The Evolution of Income Composition Inequality in Italy, 1989–2016

• Published date: 01 March 2023
• Author: Roberto Iacono,Marco Ranaldi
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/roiw.12555

© 2021 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

124

THE EVOLUTION OF INCOME COMPOSITION INEQUALITY IN ITALY,

1989– 2016

by RobeRto Iacono*

Norwegian University of Science and Technology (NTNU), University of South- Eastern Norway (USN)

AND

MaRco RanaldI

University College London, Stone Center on Socio- Economic Inequality, The Graduate Center, CUNY

We study the evolution of inequality in income composition in terms of capital and labor income in

Italy between 1989 and 2016. We document a rise in the share of capital income accruing to the bottom

of the distribution, while the top of the distribution increases its share of labor income. This implies

a falling degree of income composition inequality in the period considered and a weaker relationship

between the functional and personal distribution of income in Italy. This result is robust to various

specifications of self- employment income; nonetheless, it hinges crucially on the treatment of rental

incomes. While the dynamics of imputed rents has brought about a more equitable distribution of

capital incomes across the income distribution, that of actual rents has led to higher concentration

of capital incomes at the top in the decade preceding the outbreak of the financial crisis. Finally, we

conceptualize a rule of thumb for policy makers seeking to reduce income inequality in the long run.

JEL Codes: D31, D33, D63, E25

Keywords: income composition inequality, functional and personal income distributions, Italy

1. IntRoductIon

In recent years, the dynamics of factor income shares and its potential effect

on the level of personal income inequality has attracted considerable attention by

economic scholars (Atkinson, 2009; Glyn, 2011; Piketty and Zucman, 2014). The

documented rise of the capital income share in many advanced economies (Piketty

and Zucman, 2014) has strengthened such debate. As Atkinson (2009) suggests,

one of the main reasons to study factor shares is to establish a link between incomes

at the macroeconomic level (national accounts) and incomes at the level of the house-

hold (p. 5).

Note: We thank the editor in charge of this submission, four anonymous reviewers, F. Bloise,

A. Brandolini, E. Felice, B. Milanovic, S. Morelli, E. Palagi, F. Patriarca, M. Raitano, A. Roventini,

F. Saraceno, E. Stockhammer, participants at the 8th ECINEQ Meeting of the Society for the Study of

Economic Inequality held at the Paris School of Economics (PSE), and participants at the 60th annual

conference of the Italian Economic Association held at the University of Palermo for their helpful

comments and suggestions.

*Correspondence to: Roberto Iacono, Norwegian University of Science and Technology (NTNU),

University of South- Eastern Norway (USN), Campus Tunga, Tungasletta 2, NO- 7491 Trondheim,

Norway (roberto.iacono@ntnu.no).

Review of Income and Wealth

Series 69, Number 1, March 2023

DOI: 10.1111/roiw.12555

This is an open access article under the terms of the Creat ive Commo ns Attri butio n- NonCo mmerc ial-

NoDerivs License, which permits use and distribution in any medium, provided the original work is

properly cited, the use is non- commercial and no modifications or adaptations are made.

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Review of Income and Wealth, Series 69, Number 1, March 2023

125

© 2021 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

The literature on the topic is, however, far from reaching a consensus on the

shape of the relationship between the functional and personal income distribu-

tions. Bengtsson and Waldenström (2018) show that the link between the dynamics

of the capital share and that of income inequality does not need to be constant

over time and across countries. This link can be contingent on the production tech-

nology, the structure of personal incomes or the institutional context, all of which

may— and do indeed— change over time (p. 713). The objective of this paper is to

investigate this link, focusing on the case of Italy.

In a recent study, Gabbuti (2020) studies the dynamics of the labor share in

Italy between 1895 and 1970 and shows that its link with the evolution of income

inequality varies over time. According to Gabbuti (2020), the Italian case reveals

that factor shares offer great, complementary insights in the historical analysis of

inequality, reflecting fundamental changes in the economy and society (p. 2). To com-

plement and expand such historical analysis, this paper studies this relationship in

Italy over the past three decades. To this end, it focuses on a new inequality dimen-

sion recently introduced by Ranaldi (2021), called income composition inequality.

Income composition inequality describes how the composition of income in

two sources, such as capital and labor income, varies across the income distribu-

tion. Income composition inequality is at its maximum when the two sources are

separately earned by the top and the bottom of the income distribution, and mini-

mum when all individuals have the same relative composition of capital and labor

income. Under a high level of income composition inequality, the link between the

functional and personal distribution of income is strong. The underlying intuition

is the following: when income- rich individuals earn all capital income in the econ-

omy, an increase in the overall capital income share will raise the income of the rich

and, therefore, hamper the level of income inequality in society. The contrary sit-

uation holds true under a low degree of income composition inequality: a change

in the factor shares of income will not significantly influence the overall level of

income inequality.

To measure the level of compositional inequality, we adopt the income fac-

tor concentration (IFC) index (Ranaldi, 2021). The IFC index is a non- rank- based

measure of association and ranges between

−1

and 1. It is equal to 1 when all

capital income is concentrated at the top and all labor income at the bottom of the

total income distribution, and to 0 when all individuals have the same composition

of capital and labor income. Finally, it is equal to

−1

when the capital income is

concentrated at the bottom and the labor income at the top.

By studying the dynamics of the IFC index in Italy, we show that income

composition inequality decreases steadily between 1989 and 2016. We show that

this result is robust to different assumptions on the allocation of income across

household members, different treatment of self- employment income, and differ-

ent definitions of labor income. The main result is also robust to the exclusion of

rental incomes from the definition of capital income. However, it is affected by

the way rental incomes are treated. The exclusion of imputed rents from our base-

line income definition leads to increasing income composition inequality— or to a

higher concentration of capital income at the top and labor income at the bottom

of the distribution— between 2000 and 2008. This is explained by the fact that

actual rents have shifted toward the top in all years preceding the financial crisis.