Does classical capitalism display higher income inequality than liberal capitalism?
Classical Capitalism, where the rich have only capital income, and the rest have only labor income, and Liberal Capitalism, where many people receive both capital and labor incomes.
To answer this question Ranaldi and Milanovic construct a new indicator that maps social systems empirically, the income-factor concentration (IFC) index, and data covering 47 countries around the world over the last 25 years. Their findings:
- Higher compositional inequality (how the composition of income between capital and labor varies along income distribution) is associated with higher inter-personal inequality;
- Class-based societies are characterized by higher income inequality;
- Latin American countries have higher levels in both inequality dimensions (i.e. income and compositional inequality) than European and North American countries. The latter however have higher levels of income inequality but lower level of compositional inequality than Nordic and Central European countries;
- Nordic countries are exceptional because they combine high compositional inequality with low inter-personal inequality;
- There are no examples of countries that combine low compositional inequality and high inter-personal inequality (homoploutia). This reinforces the argument that once societies become “classless” (in the sense of having a low IFC), it is not likely that they would have high inter-personal inequality.
Capitalist Systems and Income Inequality
Authors: Marco Ranaldi, Branko Milanovic
From: The Graduate Center-CUNY, LSE
How to fix inequality
This document is based on the proceedings of a Peterson Institute conference on global inequality organized by Olivier Blanchard and Dani Rodrik.
This menu of policy recommendations is focused on the United States, with some also applicable to other advanced economies. It represents some commonly cited solutions by inequality experts, organized by policies related to taxes, education, labor, corporate regulations, and the social safety net. Economics can provide some guidance over which approach is most effective, but political attitudes toward inequality will play a significant role in which ones to focus on.
Some of the recommendations:
- Tax policy: Shift taxes toward capital and away from labor to encourage hiring workers (there are also growing calls for cross-country coordination to tax “mobile” stateless capital income); create a wealth tax as well as provide tax credits for more research and development (R&D).
- Education policies: Provide universal early childhood education and increase support for childcare; improve access to quality higher education; provide more job training; implement talent discovery and matching programs.
- Labor policies: Raise minimum wage; give employees more bargaining power at companies; protect workers in the “gig economy” and other alternative work arrangements.
- Corporate regulation policies: Create strong competition policies that promote technological innovation.
- Social safety net programs: Guarantee a minimum level of income for everyone.
How to Fix Economic Inequality? An Overview of Policies for the United States and Other High-Income Economies
By: Peterson Institute for International Economics
