income distribution

income distribution There are two types—functional and size. The functional distribution of national income shows how the total is made up of income from land, labour, and capital, or the contribution of each factor of production to the national income. In this context, income redistribution concerns arguments about whether profits should be reduced to augment employment income, for example. The size distribution of personal income shows the distribution of direct financial resources received by individuals, families, and households. This is now the most common meaning of the term. The focus is on the receipt of money income, excluding the social wage income implied by access to public goods such as state-funded education and health services.

There is no precise agreed definition of personal income, and no unambiguous operational definition setting out which items are to be included or excluded, and in what manner. Definitions tend to rely in practice on whatever information is available within administrative records, regular surveys of income and expenditure, and other sources within official statistics. One of the most common definitions is thus the earnings distribution, because data on the wages and salaries of employees and the earnings and profits of the self-employed are available from many surveys. But the definition of personal income goes wider than this and can include profits of firms in the private sector when distributed as dividends (but not the profits of state enterprises); earnings in kind and fringe benefits (such as free housing, free meals, subsidized loans or the use of a company car); unearned income from investments; income from sub-letting and other imputed income from home ownership; income maintenance payments from the state and any other benefits or insurance receipts. A distinction is drawn between income and wealth, which is the net value of all assets which can be assigned to individuals, but in reality income and capital are not separate entities and can be converted one to the other. This is an important source of practical difficulty in defining income as visible money income.

Earnings and income can be measured as current income (such as income in the last week or previous twelve months), or as usual or normal income, which will differ in cases where the current income is untypical for any reason, such as sickness or unemployment. An important distinction is made between the pre-tax and after-tax income distributions, between original incomes and disposable incomes. The distribution of original income shows the position before any income redistribution policies take effect, and always displays the widest dispersion of income. The distribution of disposable (or net) income shows the position after deducting taxes, social insurance contributions, and any other obligatory deductions from original income, then adding income maintenance and related benefits. Disposable income provides a broad measure of spending power, as distinct from discretionary income, which is disposable income less necessary expenditure on housing, travel-to-work, and similar unavoidable costs.

The distribution of income is studied to assess the redistribution effects of government fiscal and social welfare policies; as a key factor in patterns of consumption; as a measure of economic and hence social inequality, and one that is more accessible to researchers than the distribution of wealth; and to measure poverty. It is sometimes used to study the unanticipated effects of policies overtly concerned with quite different matters, such as divorce or ill-health Economists are interested in the pattern of income distribution as an independent variable in its own right, for example whether greater income inequalities lead to higher savings, or whether industrialization leads to reduced income inequalities.

Most of the (many) methodological problems of investigating income distribution, especially changes therein, are discussed in A. B. Atkinson ( ed.) , Wealth, Income and Inequality (1980)
. The evidence for Britain is usefully summarized in W. D. Rubinstein , Wealth and Inequality in Britain (1986)
. See also GINI COEFFICIENT; LORENZ CURVE.