But the same table also shows that the inequality in North America has been markedly higher in the top end of the income distribution. This difference becomes larger the higher we go in the hierarchy: the share of total income captured by the top 1 per cent is twice as large in the United States and Canada as in Europe, whereas it is three times as large for the top 0.01 per cent and four times as large for the top 0.001 per cent. To be sure, the top 0.01 per cent and top 0.001 per cent are much smaller groups than the top 1 per cent: in the United States, these two groups amount to, respectively, 25,000 and 2,500 individuals. Focusing on the evolution of the income share of this group is nevertheless highly important for our understanding of the structure of inequality: individuals belonging to these groups are ‘super elites’ who derive most of their income from capital rather than from their labour. Remember that the Gini index is a measure of total income inequality: it measures the distribution of income from both labour (wages, salaries, bonuses, etc.) and capital investments (banking accounts, stocks, bonds, real estate and other assets). This is also the case for the income share of different groups discussed above. The key issue here is that income from capital – for example, interest rate income on savings accounts and bond investments, dividend income on stock investments (see box 1.1), rental income on real estate, etc. – becomes increasingly important for groups at the top end of the income hierarchy.
Box 1.1 Stocks and bonds
Stocks and bonds are financial assets that can be bought and sold on financial markets. Firms issue stocks and bonds to attract funding, which can be used to finance their operations or expand their production. Stocks and bonds have different implications both for the firm and for the owner of these assets. The purchaser of a company’s stocks becomes a partial owner of the firm – a shareholder – who receives a part of the company’s profits every year in the form of a dividend. The purchaser of a company’s bonds is only a lender to that company: bonds are a certificate of indebtedness that specifies the obligations of the borrower to the owner of the bond; it identifies the time at which the loan will be repaid (called the maturity) and the rate of interest that will be paid periodically until the loan matures. As such, investing in a company’s bonds is less ‘risky’ than investing in its stocks, as bond investors can be sure to get all their money back if the company does not go bankrupt. The returns for a stock investor, by contrast, depend on the profitability of the firm and its performance on the stock market. See chapter 5 for a more elaborate discussion.
Most individuals do not own stocks or bonds on their own account. In most cases, individuals invest their money in stocks and bonds (or other types of financial assets) through institutional investors like private pension funds and mutual funds. These institutional investors pool money from both small savers and wealthy individuals to purchase a variety of financial assets in order to diversify risk. Although many middle-income households have invested some of their savings in financial assets through these institutional investors, the ownership of financial wealth remains highly unevenly distributed in every society. In the United States, for instance, the top 10 per cent of US households owns more than 80 per cent of all the stocks that have been issued by publicly listed US corporations.
Functional income distribution
Why does this matter? The relative importance of capital income for the top 1 per cent – and especially for the top 0.1 per cent and top 0.01 per cent – suggests that these groups are the main beneficiaries of the declining labour share and parallel rising capital share in national income. The statistics on income inequality that we have discussed so far are measures of the personal income distribution – that is, the distribution of income between the various individuals or households in a country. Another important indicator for our purposes is the functional income distribution, which measures the distribution of income between the two factors of production – that is, the inputs that are needed by firms to produce goods and services: capital (which also includes land) and labour. In capitalist economies, firms make profits by adding value to the raw material and intermediate goods consumed in the production process, using both labour (workers and managers) and capital (factory and administrative buildings, machines and equipment). The gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time, where ‘final’ means that the value of intermediate goods – that is, parts and components that are used to produce final goods – is not included (to avoid double accounting). GDP is, perhaps, the single most important concept in economics, because it represents the economic size of a country as well as the national income that is generated in a country every year. Hence, GDP is a reflection of a country’s material well-being: GDP per capita gives an approximate idea of how much money an average citizen earns in a particular year.
A key problem with the concept of GDP and national income is that it tells us nothing about the distribution of that income. While the average annual income of a US citizen was about US$59,000 in 2017, a top manager of a large US firm received a multiple of that amount while a retail worker earned much less. Measures of personal income distribution like the Gini index or the income share of the top percentile give us information about the degree of income inequality, and should always be considered together with data on GDP and GDP per capita in order to get a full picture of a country’s economic well-being. Measures of functional income distribution represent a different type of income distribution: the labour share and capital share of GDP or national income indicate how the national income of a country is distributed between the two factors of production in that country; they measure how much of the added value that has been generated in a country is seized either by the sellers of labour (in the forms of wages, salaries and other employment-related income) or the owners of capital (in the form of profits, rents and other investment-related income). The best way to understand a country’s labour and capital share is that they offer an idea of how the value added and profits of firms in that country are, on average, divided between its workers and managers (who supply labour) and its shareholders (who own the firms and supply capital). Since labour and capital are both needed to produce goods and services, the labour and capital share indicate how much of the profits from selling these goods and services goes to either labour or capital.
The labour share of national income seems to capture the Marxist notion that capitalism features intrinsically competing interests between the working class and the owners of capital (see below) – that is, that there is a ‘zero-sum’ conflict between capital and labour over the division of