Capital and Wage share. Causes of Inequality.

Capital and Wage share. Causes of Inequality.

Other important cause of Economic inequality in the society is the importance of capital in relation to labor.

Typically, we think about the economic equality only in terms of the income from our job (or services), but especially rich people also gain income from capital – properties, investments and/or business.

How does this lead to a higher inequality? First of all, capital is not evenly distributed. Moreover, it is less equally distributed than income, most people have jobs, but only few own capital. On the other hand, the value of capital itself is much higher than the value of labor.

Growing value of capital in relation to labor, is one of several explanations to why, despite a steady decline of the inequality index in the last decade as well as decreasing poverty line, the median monthly salary of 50% of Chilean working population does not cover rent and living expenses.
In terms of global political context, a quickly growing income gap in the USA became part of the government agenda in about 2009 with a strong call from the Democrats to fix it and was associated with socially oriented policies from Obama government.

It is possible, that with the impressive economic expansion over the last two decades and generally positive indices for inequality and poverty rates, Chile did not see the income gap as a cause of the violent social outbreak of 2019 and rewriting the constitution, as its outcome. The reason is that in the growing Chilean economy the poverty was decreasing much more slowly comparing to how quickly the income gap went up. Nevertheless, uneven distribution of capital in relation to labor share remains a significant cause for the economic inequality in Chile and globally, and is likely to grow further.

One of possible solutions to tackle this problem is an inheritance tax. in European countries, for example, the inheritance tax is almost double the world average, and goes as far as 22% for a property worth over US $3 million in France. Taxation is seemingly the most obvious solution for wealth inequality, nevertheless it is important to approach this problem with care and evaluate possible negative consequences, such as tax evasion. It is important to think of other forms to tackle capital/labor inequality which would not interfere with economic efficiency.

Capital Shares and Income inequality: Evidence from the Long Run

How Income Inequality Is Affected by Labor Share

McKinsey provides an extensive overview on the factors of decreasing labor share in the USA in this article