On the Measurement of Functional Income Distribution

The present work proposes a framework for the analysis of inequality in income composition. Hinging on the recent work by Ranaldi (2017), we here propose a metric of income-factor polarization, the Income-Factor Polarization Index If, that captures the extent to which two income sources, notably profits and wages, are polarized across the distribution of income. We measure income-factor polarization as the distance between the Polarization Curve of Income Source and the Zero-polarization Curve, suitably normalized. The former is the cumulative distribution of income source across the population with individuals being indexed by their income rank, and the latter is the benchmark of zero inequality in income composition, defined as the situation in which each individual has the same population share of profits and wages (Ranaldi, 2017). The greater the distance, the higher the polarization. We show that the index narrows down to a single one the two conditions for the rising share of capital income to increase overall income Gini introduced by Milanovic (2017), which is : If > 0. The methodology is finally illustrated via an empirical application on the case of Italy