It is possible to compute household income (before taxes and transfers) by sector, and as important, to divide household income into skilled and unskilled categories. The labor coefficients (LaborF) computed from the GTAP database allow that; the IFs IO threshold system creates average versions at across countries of input-output matrices and also labor skill levels at increasing levels of GDP per capita at PPP, and then uses GDPPCP to fill country-holes in initialization and to change the skill level profile as GDPPCP changes over time. Those sector-specific coefficients are weighted by sector-specific value added to compute the total relative-price-adjusted value added (VADDRPA) going to unskilled and skilled households, respectively (VADDHHU and VADDHHS). Those shares are then summed to provide household income for each household type (HHINC). Firm income is the remaining GDP (equivalent to the capital share), augmented by any foreign direct investment (XFDIFIN) or portfolio investment (XPORTFIN).
The income share computation also introduces a skill shift term (SkillShiftMul). The basis for the term is a presumption that over time there is a greater demand for skilled labor and a commensurately lower demand for unskilled labor. The rate of annual change has been initially set at 0.3 to 0.4%, corresponding approximately to the core level of change in multifactor productivity (analysis suggests that the rate might be a little low). There is much room for endogenization and refinement of this highly aggregate and rough specification. The importance of it lies in the re-allocation of household income away from unskilled households to skilled households. Because of the great growth in education around the world, and therefore the proportionately faster growth of skilled households, there is, in fact, credential inflation; in the absence of it, the supply of skilled labor would be increasing much faster than the demand for it and the price of it relative to unskilled labor would drop sharply. That is not happening in the world.
where exponent decreases with GDPPCP
We need also to know the net flow of funds from firms to households, and how that is split between the two types of households. A simplifying intermediate step is to compute firm income after taxes (see the discussions of government revenues and expenditures for explanations of terms such as FIRMTAX, FIRMGOVSS, INDIRECTAX, HHTAX,GOVHHTRNWEL.
IFs computes in the first year a firm investment ratio (FirmInvRI) as a general estimate of the portion of firm income after taxes that is used for gross capital formation. The residual after capital formation (investment) is the portion that is passed back to households as dividends and interest. In the absence of data on the distribution of dividends and interests between unskilled and skilled labor-based households, equations arbitrarily assign the overwhelming share of it, namely 90%, to skilled households.
At this point it is possible to compute household income adjusted by all transfer payments from government and firm's dividends. Household disposable income (HHDispInc) is that gross income minus taxes. It is disposable income that IFs takes to the calculation of consumption and, as a residual, net savings.
It is also desirable to know the household income per capita (HHINCPC), which requires knowing the size of the household population (HHPOP) in each household type (that is, skilled and unskilled). The model assigns total population to households based on the labor supply (LABSUP) in each household type, thereby assuming equal household sizes.