What is Capital Income

Is capital income becoming more and more important?

Around 200 years after the classical economist David Ricardo published his theory on the distribution of income among the production factors labor, chapter and land, this distribution is again a topic of conversation. With increasing technology, the owners of capital would claim more and more of the wealth cake for themselves compared to employees, fear expressed in many places. But: is the scenario more than a nightmare?

An honest answer is not entirely clear. Even after almost seven decades of research on the topic, much remains open (Cho et al. 2017) and new research results raise further questions. The choice of data basis and methods has a fundamental influence on the results. The following sections outline some of the basic insights into the subject. In principle, however, the importance of the share of capital income in total income is sometimes overestimated: the dividing line between “worker” and “capitalist” is becoming increasingly blurred in modern industrialized countries - partly due to funded old-age provision - which limits the informative value of the wage share.

The decisive factor is how the income of the self-employed is taken into account

One of the things that leads to different results is the income of the self-employed. They are not shown individually in the national statistics that are used to calculate the share of earned income, which makes it difficult to capture them empirically correctly (Cho et al. 2017).

A study by the International Monetary Fund (IMF 2017) shows how great this influence is. This shows how high the share of earned income is in total income if the income of the self-employed is not specifically taken into account, and if a model is used that takes into account the specific characteristics of the income of the self-employed. In the “basic model”, the share of earned income in 2014 total income was around 51% in developed economies and around 38% in emerging countries. In the adapted model, the proportions for developed economies are around ten percentage points higher, in the emerging and developing countries it was even up to 20 percentage points. The more detailed the data are considered, the more important is the earned income in relation to total income.

In Switzerland, the share of earned income is even increasing

The study by the IMF shows, across all countries, a slightly negative trend in the share of earned income in total income, both in developed economies and in emerging and developing countries. For developed economies, an income share (without special consideration of the income of the self-employed) between 54.7% in 1970 and 51% in 2015 is reported. According to these data, however, the proportion has only fallen by less than one percentage point since 1995. In emerging economies, this proportion varied between 37 percent and 38 percent from 1994 to 2014. A look at individual countries, on the other hand, shows greater differences. In some nations the reduction is much more pronounced than the mean values ​​would suggest; elsewhere, earned income has even gained in weight.

Switzerland is one of those countries that does not have a falling wage share. In this country, capital income has grown no faster than wage income. On the contrary: According to this estimate, the share of labor income in the total cake has increased by 0.3 percent per decade. This clearly sets Switzerland apart from other rich countries such as Germany, the USA or Norway.

So is Switzerland a special case, like an island of the happy in a world in which, in many places, more and more capital owners and less and less “normal workers” can reap the fruits of hard work?

Well, not quite. On the one hand, there are different views as to whether there is even a downward trend across several countries, as the International Monetary Fund (IMF 2017) sees. The OECD (Cho et al. 2017), for example, has argued that no general negative trend can be shown if the actual disposable income is considered instead of gross figures from national statistics. On the other hand, research specific to Switzerland does not describe any significant change in the share of income from employment, but it does find differences for different levels of education. Michael Siegenthaler and Tobias Stucki from the business cycle research center KOF (2014), for example, described their conclusions some time ago. On the basis of company data, the two authors paint a differentiated picture. The advancing development makes education more important. The share of earned income in total income has also risen according to their calculations, but this - and that is the decisive point, especially for those with a good education. That could give an indication of what to focus on in the future.

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