The document discusses the impact of functional income inequality on economic growth, governance, and social cohesion, emphasizing how it is exacerbated by weak institutions and social structures. It highlights the drivers of inequality such as asset distribution, wealth inequality, and the effects of the 2008 financial crisis, while suggesting that effective macroeconomic policies can mitigate these effects. The post-2015 development agenda targets reducing inequality through specific measures, urging the inclusion of inequality goals in future frameworks.

1. Functional Income inequality
and the post 2015 Agenda
Rolph van der Hoeven, ISS
DSA Conference Birmingham
16 November 2013
Session 25
Organised by the Broker

2. Why income
inequality matters
• Where markets are underdeveloped, inequality
inhibits growth through economic mechanisms;
• Where institutions of government are weak,
inequality exacerbates the problem of creating and
maintaining accountable government, increasing
the probability of economic and social policies that
inhibit growth and poverty reduction;
• Where social institutions are fragile, inequality
further discourages the civic and social life that
underpins effective collective decision making that
is necessary to the functioning of healthy
societies.

3. (Income) Inequality:
Various Forms

Asset Distribution (Land, Education, Health)
Functional distribution(Share in GDP of Labour ,

Personal(household) income distribution:

Land and Capital)

Primary distribution


Secondary distribution


Before Taxes and Transfers
After taxes and transfers
Tertiary distribution

Including imputed value of acces to Government(
Social) Services
3

4. Why Increased attention
Functional Income Distribution?
• to make a link between incomes at the
macroeconomic level (national accounts)
and incomes at the level of the household;
• to help understand better inequality in the
personal distribution of income;
• to address the concern of social justice
with the fairness of different sources of
income.

5. Effect of the 2008 crisis on various
socioeconomic groups

7. Drivers and functional
inequality
• Neo classical economist argued labour share
constant
• Functional income inequality determinant for
Household income distribution
• Factual wrong: Labour share affected by





Changes capital output ratios
Capital controls,
Exchange rate crisis
Trade volumes
Weaker bargaining power labour

8. Importance of Top
incomes
• Share of top-income increasing
 Higher capital share
 Higher wages executives
• Better documented in OECD countries(
Piketty,Atkinson), but more information
now becoming available for developing
and emerging countries
( UNU WIDER and Credit Suisse)

9. Wealth Inequality
• One of the important drivers of factor or functional
inequality is the large inequality in wealth and in
human capital.
• Wealth is distributed far more unequally than
incomes in all countries for which data are
available.
• the Gini-coefficient of the distribution of personal
wealth ranges from 0.55 to 0.80 which is in all
countries higher or much higher than for the
distribution of primary (market) income
• inheritance is an important component of wealth.
• Equally dominant is the effect of acquirement of
human capital.

10. Decline in wage share in both developed
and developing countries

11. Decline of Wage share in
developing countries

12. Decline of wage
share in developed
countries

13. Decline in China

14. Decomposition

15. Financialization and changes in the wage
share

16. Wage inequality
share of wages in National income declined but
also the distribution of wages themselves has
also become more unequal
Consequence of mix of openness, skill
premiums and institutional factors ( incl.
gender)
Schooling often not able to offset
Tinbergen theory of 1975 race between
technology and education relevant again

17. Macro Polices and
Functional Inequality
Macro Economic policies:
• preventing crises (from external shocks) is achieved by
controlling foreign indebtedness, controls on portfolio flows, a
managed exchange rate regime) and macro prudential
banking regulation.
• ensuring a reasonable macroeconomic balance (low inflation,
control of aggregate demand with employment and
distributive concerns) is achieved by a balanced current
account policy, countercyclical fiscal policies( with social
safety nets as automatic stabilizers), greater use of
progressive taxation as well as moderate ,countercyclical
monetary policy.
• promoting equitable growth is achieved by a managed
exchange regime, managed open trade policy and fiscal
policy.

18. Example of Latin American
path ways ( Cornia )
• The ‘competitive real exchange rateunemployment reduction-inequality pathway.
• The higher taxation-redistribution pathway.
• The growth-inequality pathway.
• The prevention of external crises - lower instability
– inequality pathway.
• The banking regulation- domestic banking
stability-inequality pathway.

19. In Short
Financialization and skills based technical change have been important
drivers of functional and wage inequality. These drivers have in various
cases also strengthened existing patterns of inequality through a still
stubbornly high wealth inequality and through intergenerational
transfers of inequality through skewed access to higher-level education.
National policies, including the a strengthening of institutions to deal
with inequality can be important drivers of income distribution. Several
countries in Europe manage to drive a high primary income distribution
down to a modest or low level of secondary and tertiary income
distribution, however functional inequality is increasing and
redistributive policies are weakening
Various Latin American countries have been able to arrest the upward
trend of growing inequality and to drive inequality in the region( the
highest in the world ) down to lower, but still at yet high levels of
inequality. They used an extended mix of macro economic, exchange
rate , structural and social policies to that end.

20. Post 2015 development
agenda goal on inequality
• Inequality target based on Palma ratio:
• Ratio share top 10 % income earners to
the bottom 40%
• Full equality 0.25 but for more equal
societies around 1.
• In unequal society ratio can go up to 7

21. HLP report (spring 2013)
When everyone, irrespective of household income, gender, location, ethnicity,
age, or disability, has access to health, nutrition, education, and other vital
services, many of the worst effects of inequality will be over (p.16).
The report looks at inequality purely from a supply side argument and fails
to recognise the importance of economic and social transformation in
bringing about employment and income equality
Furthermore for emerging and developed economies the issue of inequality
is perhaps more important than the issue of poverty alleviation. It remains
thus important to include a goal on reducing inequality, with appropriate
indicators, in a post 2105 system