Sources of Inequality in Italy

Working Paper 2018-479

Abstract

In this article, we study the link between the functional and personal distribution of income, focusing on the case of Italy between 1989 and 2016. To this end, we rely on the novel concept of income composition inequality. Income composition inequality focuses on how unequally the composition of income is distributed across the population. The higher the overall degree of income composition inequality is, the stronger the link between the functional and personal distribution of income. We show that the strength of this link decreased steadily in Italy over the period considered. This result is robust to the use of different definitions of capital and labor and different estimation techniques of the degree of income composition inequality. The implications of this result are twofold. First, fluctuations in the total factor shares of income are having an increasingly weaker impact on income inequality in Italy. Second, Italy is moving towards becoming a multiple sources of income society. Finally, we conceptualize a simple rule of thumb for policy makers seeking to reduce income inequality in the long run: This rule relates fluctuations in the total factor shares and the level of income composition inequality to the specific income source to be redistributed.

Authors: Roberto Iacono, Marco Ranaldi.