Macroeconomic effects of personal and functional income inequality: Theory and empirical evidence for the US and Germany

Abstract

This paper presents a simple post-Kaleckian model of distribution and growth that incorporates personal income inequality and interdependent social norms. The model shows in an easily accessible manner that macroeconomic effects of changes in personal and functional income distribution can potentially reinforce or dampen each other. The resulting variety of demand and growth regimes is due to different distributional effects on consumption demand. Therefore, the second part of the paper investigates the empirical relevance of the additional demand regimes by estimating aggregate consumption functions with variables for personal and functional income distribution for the United States and Germany. We find similar effects of functional income distribution for both countries. However, for the US, we find positive long-run effects of personal income inequality on consumption. The effect is strongest for the top 10% income share and the Gini index and less strong for the top 5% and 1% income shares. While this is evidence for relative consumption patterns, it also supports the view that the “super rich” are a relatively distant class for most people - questioning the notion of expenditure cascades from the very top to the very bottom. In contrast, for Germany we fail to find compelling evidence for effects of personal income distribution.

Keywords

• income inequality
• personal and functional income distribution
• relative income hypothesis
• Kaleckian model