Economic Insights — Political reforms often change the bargaining position of workers and thus labor’s share of income. This helps us understand how politics affects inequality via the labor share.
In this article, we focus on one aspect of inequality: how income is split between capital and labor. Because capital ownership is concentrated, the division of income between capital and labor also affects income inequality. The fiscal response to COIVD-19 illustrates this, as it may have inadvertently redistributed income from capital to labor. By focusing on big political events such as coups and democratic transitions in various countries over the past few decades, we document that the political process is indeed an important driver of the distribution of income between capital and labor.
This article appeared in the Second Quarter 2022 issue of Economic Insights. Download and read the full issue.
