Unearned Income and its Distribution

In any society, there will be real output (real income) that is not produced solely by humans. Some real income is due to the contribution of nature – land, natural resources, beneficial weather patterns, animals and so on. Some real income is produced by machines, robots and other means of production that were created by prior applications of labor in combination with nature. In any given accounting period, this real income is ‘unearned’ in the sense that it is not due to human effort exerted within the period. Much of it currently flows to industrial capitalists and rentiers on the basis of property ownership rather than productive contribution. Over time, the real productive contribution of means of production can be expected to rise, due to technical progress. In this post, a framework is tentatively suggested for thinking about the distribution of unearned income, both at a point in time and as it grows over time.

The presence of ‘gifts’ of nature and technology poses the question:

Who is entitled to this unearned income?

In response to this question, workers might argue that technology is the result of the past application of labor, and so its fruits – including the real benefits of higher productivity – should belong to them. Capitalists might retort that workers have been duly paid for their past labor and, in fair exchange, capitalists have received the products of labor, including improvements in technology, as their rightful property. Scientists, engineers and inventors might suspect that technical progress is due to their ingenuity, and should entitle them to a stream of revenue into the indefinite future. Entrepreneurs might claim that many scientific advances were contingent on the financial backing they extended to innovators. Government might take the view that technical progress is ultimately the outcome of public investment in education, science and technology. Voters might feel that they elected the government, thereby authorizing the application of some real resources to the development of technology rather than current consumption, and so deserve due credit for the technical advance.

My own view is that unearned income should ideally belong to all of us.

Having said that, it follows from the capital debates that there is no way of discerning the true extent to which real income is due to labor rather than technology or nature. There is no good reason to suppose that wages reflect the productive contribution of workers; or that profit on enterprise reflects the productive contribution of means of production; or rent, the contribution of nature; or interest, the contribution of money capital. In reality, the distribution of income is a matter of social choice. There is no single, ‘correct’ level of wages, and likewise no single, correct level of profit income.

Since the distribution of income is socially determined, there is scope for it to be modified through collective action. If the current share of wages strikes many as being too low, there is nothing to stop us acting collectively to bring about a change in the status quo. But whatever new distribution we arrive at will have the same appeal to legitimacy as the current distribution of income: namely, the legitimacy that comes from an uneasy, contingent and quite possibly fleeting backing of the community.

Although there is no objective basis for the ‘initial’ distribution of income, once a consensus has been arrived at, it does seem possible on the basis of this consensus to isolate a part of future income that can similarly be deemed unearned. This will be the increment in income that is attributable to future improvements in productivity, since this increment will largely, if not exclusively, be due to technical progress.

Strictly speaking, productivity improvements may be due not only to technical progress but also to an increase in the intensity of labor. To that extent, higher productivity should be conceived as adding to earned rather than unearned income. But, in the long run, the capacity to improve productivity through a higher intensity of labor is limited. Even to the extent a higher intensity of labor can be achieved and sustained, it may largely be due to better health care, education and dietary improvements, all of which reflect increased knowledge, and so technology in its broadest sense. At the very least, it seems reasonable to suggest that the trend growth in productivity over time will primarily reflect technical progress rather than a greater intensity of labor.

If so, then conceptually it may be helpful to break the social determination of the distribution of income into two steps:

1. The reaching of a social consensus over the appropriate level of wages and, by implication, unearned income at a given point in time.

2. A decision over the way in which the real benefits of productivity growth are to be distributed over the period of consensus.

This division is more conceptual than actual. There is no need to think of step 1 as involving a once-for-all decision over the appropriate remuneration of workers’ labor time. This social choice can be updated at any time through collective decision making and the exercise of political and industrial pressure.

In order to focus on step 2, however, suppose that a consensus on step 1 remains in place for a time; say, n periods. It may not be a consensus in the true sense but simply a duration of time in which social forces are insufficient to dislodge the status quo. It doesn’t really matter how the status quo persists, for present purposes. What matters is the recognition that income attributable to productivity improvements over the n periods is unearned, implying that neither workers, capitalists, nor workers and capitalists, should capture it all. Rather, as unearned income, it should go to everybody.

Suppose that a basic income, as part of a ‘job or income guarantee‘ (JIG), is introduced. Suppose, further, that the basic income is paid equally to all but is largely offset by progressive taxation such that the wealthy face an increase in taxes exceeding the basic income transfer. In the National Accounts, transfer payments are categorized as negative taxes. For present purposes, however, it seems useful to separate out basic income, while continuing to treat other transfer payments as negative taxes. If this analytical device can be indulged, then under capitalist conditions three main categories of after-tax real income, Y, present themselves:

Y = W + B + Π

By consensus, wage income, W, is deemed to be the earned component of income. Basic income, B, and profit income, Π, are unearned in the sense that they are not linked to labor time performed by the recipients. In the case of basic income, recipients may well be working, either in the labor force or outside it, but the basic income payment is not tied in any way to this productive contribution.

At the beginning of the period of consensus, workers would receive wage income plus a share of basic income:

W + (L/P)B

Here, L is employment and P is the size of the population. The expression depicts basic income as going to workers in proportion to their representation in the population as a whole.

The rest of society would receive basic income and, in the case of capitalists, profit income:

(1 – L/P)B + Π

Suppose that in the first of n periods after the consensus has been reached, productivity rises by the percentage ρ. The additional increment in income due to productivity growth – call it the ‘productivity dividend’ – amounts to ρY= D.

We can envisage various social choices when it comes to the distribution of this productivity dividend. One possibility is that it could go entirely to basic income on the grounds that the income is unearned and the rightful entitlement of all. For given wages, this would require a taxing away of extra profit income, due to rising productivity, of the amount D. Workers could then receive an additional amount (L/P)D while the rest of society received an extra (1 – L/P)D. In total, workers would receive:

W + (L/P)(B + D)

The rest would receive:

(1 – L/P)(B + D) + Π

The consequence of this social choice would be to cause the incomes of ‘wage earners’, ‘capitalists’ and ‘others’ to change gradually over time as proportions of total income. For example, if initial income was $100b, of which wage, basic and profit income were $40b, $40b and $20b, respectively, and then productivity rose by 10% over the n periods of consensus, total income and basic income would both increase by $10b while wage and profit income remained constant. If 50% of the population was employed and this proportion remained constant, so that workers received half the basic income, workers’ share in total income would fall from 60% ($60b of $100b) at the beginning of the n periods to 59% ($65b of $110b) by the end of the period of consensus. In general, though, depending on the labor force participation rate, workers’ share in total income can rise, fall or remain constant when the productivity dividend flows entirely to basic income. The share of capitalists, in contrast, generally falls. In the present example, it would fall from 20% to 18%. The share of individuals receiving only basic income will generally rise. In the present example, it would rise from 20% to 23%, assuming the number of capitalists is negligible compared with the total population.

The present numerical example depicts a process in which income would be progressively separated from labor time and workers gradually enticed into free time. This shift would not involve a complete replacement of work with leisure, since much productive activity, even though unpaid, occurs outside the labor force in the form of housework, child care, aged care, volunteer work of many kinds, freeware development and so on. The example also depicts a declining profit share, which would be appropriate if the aim is to move toward more collective ownership of the means of production and public provision of goods and services.

If, instead, it was deemed that either exit from the labor force or withdrawal of private employment opportunities was occurring too rapidly, a number of levers would exist for partially reversing the trend. One option would be to distribute the unearned increment in income somewhat preferentially to labor force participants and/or capitalists. In the present example, if wage, profit and basic income all grew in line with productivity, the proportional shares of workers, capitalists and others would remain constant. Or, of course, wage and profit income could grow more rapidly than productivity at the expense of basic income.

Alternatively, or in addition to the first option, a new consensus could be reached in which wages and/or profits were lifted relative to basic income. One mechanism available to policymakers in the case of insufficient wages would be to increase the job-guarantee wage relative to the basic income payment. This could be expected to have a flow-on effect throughout the rest of the economy by exerting pressure on other employers to raise wages and salaries.

In thinking about the initial distributive consensus, my own view is that the income share of low-paid workers, at present, is certainly too low relative to high-paid workers. The introduction of a job guarantee, either as part of a JIG or in isolation, would be an effective mechanism for boosting the living standards of low-paid workers in addition to its other benefits (nominal price anchor, automatic stabilizer, enhancer of social justice and so on).

But I also hold the view that the incomes of many outside the labor force are also far too low. In the absence of a basic income, there seems little justification for the current reality that much work in the home and community goes unpaid. The introduction of a basic income or the inclusion of these activities in a broadly defined job guarantee would partially redress this situation. If doing so required an increase in taxes on labor force participants as well as capitalists, that would seem to be the necessary price for enhanced social justice. There should be some evening out of the incomes of unpaid and paid workers, just as there should be some evening out of the incomes of low-paid and high-paid workers, and low-paid workers and capitalists.