There are different arguments about the relationship between functional and personal income distribution. Piketty (2014) offers a gloomy evaluation and outlook: When wealth increases faster than national income, the share of capital income out of national income rises, and as growth slows, the existing wealth becomes even more predominant. On the other hand, Chang (2015) argues that inequality in labor income, rather than that in capital income, is a more pressing issue in Korea. Such diagnosis leads to the suggestion that mitigating the duality in the labor market is the priority over income distribution between production factors. Although there is a near consensus that primary distribution between production factors is worsening in Korea, it is not yet clear how it is related to personal income inequality. This paper reviews the relationship between labor income share and household income inequality, and is structured as follows. Following a brief overview of previous literature in Chapter Ⅱ, Chapter Ⅲ notes the discrepancy in the labor income share between the National Account and household surveys. Labor income share in Korean household surveys has been surprisingly increasing, but this could be attributed to the underestimation of property income. Chapter IV then points to the increase in corporate savings that do not circulate back to households as another reason why household surveys underestimate inequality between production factors. Compared with the developed economies, corporate savings have increased much more steeply in Korea since 2000 relative to the decline in labor income share. It also appears that the income share of top earners has increased faster than that of corporate savings. Chapter Ⅴ shows, using factor decomposition and simulation methods, that an increase in labor income share at the household level would help improve income inequality. Lastly, Chapter Ⅵ calls for a more equitable distribution of production factors to further rein in income inequality.

I. Introduction 7 II. Literature Review 8 III. Trend in Labor Income Share: Inconsistency between National Account and Household Surveys 11 IV. Corporate Savings and Top Income Share 15 1. Decline in labor income share and rise in corporate savings 15 2. Corporate savings and top incomes 20 V. Relationship between Labor Share and Income Inequality in Household Surveys 22 1. Analysis data 22 2. Static factor decomposition of household income inequality by income source 23 3. Dynamic factor decomposition of household income inequality y income source 26 4. Factor decomposition using a simulation experiment 28 VI. Summary and Policy Implications 32 References 34