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Macroeconomic Effects of Personal and Functional Income Inequality: Theory and Empirical Evidence for the US and Germany

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  • Franz J. Prante

Abstract

This paper presents a simple post-Kaleckian model of distribution and growth that incorporates personal income inequality and interdependent social norms. The model shows in an easily accessible manner that macroeconomic effects of changes in personal and functional income distribution can potentially reinforce or dampen each other. The resulting variety of demand and growth regimes is due to different distributional effects on consumption demand. Therefore, the second part of the paper investigates the empirical relevance of the additional demand regimes by estimating aggregate consumption functions with variables for personal and functional income distribution for the United States and Germany. We find similar effects of functional income distribution for both countries. However, for the US, we find positive long-run effects of personal income inequality on consumption. The effect is strongest for the top 10% income share and the Gini index and less strong for the top 5% and 1% income shares. While this is evidence for relative consumption patterns, it also supports the view that the “super rich” are a relatively distant class for most people - questioning the notion of expenditure cascades from the very top to the very bottom. In contrast, for Germany we fail to find compelling evidence for effects of personal income distribution. Key words: Income inequality, Personal and functional income distribution, Relative income hypothesis, Kaleckian model. JEL: C22, D31, D33, E11, E12, E25. Rad predstavlja jednostavan post-Kaleckijev model distribucije i rasta koji uključuje nejednakost ličnog dohotka i međusobno nezavisne društvene norme. Na jednostavan i dostupan način model pokazuje da makroekonomski efekti promena u distribuciji ličnog i funkcionalnog dohotka mogu potencijalno međusobno da se pojačaju ili ublaže. Rezultirajuća raznolikost u režimima tražnje i rasta je posledica različitih distributivnih efekata na potrošačku tražnju. Zbog toga, drugi deo rada istražuje empirijski značaj dodatnih režima tražnje procenjujući agregatne funkcije potrošnje sa varijablama za distribuciju ličnog i funkcionalnog dohotka za SAD i Nemačku. Nalazimo slične efekte za distribuciju funkcionalnog dohotka za obe zemlje. Međutim, za SAD, utvrđujemo pozitivne dugoročne efekte nejednakosti ličnog dohotka na potrošnju. Efekat je najjači za najviših 10% udela dohotka i Džini indeks i slabiji za najviše 5% i 1% udela dohotka. Iako je to dokaz za relativne potrošačke obrasce, takođe podržava stav da su “super bogati” relativno udaljena klasa za većinu ljudi - u pitanju je pojava potrošačke kaskade od samog vrha do samog dna. Nasuprot tome, za Nemačku nismo uspeli da pronađemo ubedljive dokaze za efekte distribucije ličnog dohotka. Ključne reči: Nejednakost dohotka, lična i funkcionalna distribucija dohotka, hipoteza relativnog dohotka, Kaleckijev model.

Suggested Citation

  • Franz J. Prante, 2018. "Macroeconomic Effects of Personal and Functional Income Inequality: Theory and Empirical Evidence for the US and Germany," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 65(3), pages 289-318.
    • Handle: RePEc:voj:journl:v:65:y:2018:i:3:p:289-318:id:515
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    Cited by:

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    2. Köhler, Kasper, 2018. "The limits to profit-wage redistribution: Endogenous regime shifts in Kaleckian models of growth and distribution," IPE Working Papers 112/2018, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    3. Eckhard Hein & Eckhard Achim Truger, 2017. "Opportunities and limits of rebalancing the Eurozone via wage policies," FMM Working Paper 06-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Hein, Eckhard & Prante, Franz, 2018. "Functional distribution and wage inequality in recent Kaleckian growth models," IPE Working Papers 110/2018, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

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    More about this item

    Keywords

    Income inequality; Personal and functional income distribution; Relative income hypothesis; Kaleckian model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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