The functional distribution of income: a review of the theoretical literature and of the empirical evidence around its recent pattern in European countries

The interest around the functional distribution has gained a new momentum since the late 1980s with new theoretical advances of Neo Classical economics and with the contemporary large swing in favour of capital incomes that characterized most European countries. This paper revises the theoretical literature on the interplay between factor shares and economic growth, and it describes the competing evidence around the determinants of the large and enduring fall in the labour share experienced in Europe. The literature has produced a shared consensus on the determinants of the wage push in the 1970s and on the decline of the labour share in the 1980s, but there is still a unsettled debate on the reasons for the enduring decline over the 1990s. The paper also focuses on the possible impact of this significant change in the functional distribution of income on the interpersonal income inequality, evidencing the role in this respect of labour market and welfare institutions.