Functional and personal income distribution and their effect on demand: an empirical assessment on the EU-15 countries

This study empirically examines how both personal and functional income distribution affect aggregate demand across EU-15 countries over the period 1980–2020. Using an extended post-Kaleckian Bhaduri-Marglin framework, we integrate the strengths of structural and aggregative approaches, estimating each demand component within a system that accounts for endogeneity and cross-equation dependencies. A key contribution is the explicit incorporation of personal income inequality—measured via both the Gini and Theil indices—into a framework traditionally centered on functional distribution. Our findings indicate that aggregate demand cannot be unambiguously classified as either wage-led or profit-led with respect to functional distribution. However, personal income distribution is clearly associated with an “equality-led” demand regime: higher inequality dampens domestic demand. These results carry important policy implications, especially in challenging the widely held notion of a tradeoff between growth and equality.