Drivers of income inequality examined

A more unequal distribution of earnings is not the only factor behind growing household income inequality in recent decades, according to a study from researchers based in France. Income from self-employment and from capital has also played a role in boosting inequality.

The report looks at data for six countries (Canada, Germany, Norway, Sweden, the United Kingdom and the United States of America) and attempts to disentangle the different 'factor components' involved in increasing inequality.


Key points

  • Although changes in the distribution of earnings have been an important force behind recent trends, particularly in the USA, they have not been the only one.
  • Greater earnings dispersion has in some cases been accompanied by a reduction in the share of earnings in national income, which has dampened its impact on overall household income inequality. This is particularly the case in the continental Europe economies.
  • In some countries the contribution of self-employment income to inequality has been on the rise, for example in the UK.
  • In other countries, increases in inequality in income from capital account for a substantial fraction of the observed distributional changes.

The authors raise a number of questions for future research. One is whether there is a causal relationship between an increase in earnings dispersion and a reduction in the share of earnings in total household income, as observed in several countries. Another is whether higher self-employment is also linked in some way to increased earning dispersion, perhaps as a result of greater wage uncertainty.

Source: Cecilia Garcia-Peñalosa and Elsa Orgiazzi, Factor Components of Inequality: A Cross-Country Study, Aix Marseille School of Economics (France)