GINI DP 30: Stylized Facts on Business Cycles and Inequality

Business cycles are expected to contribute to drive the dynamics of inequality of countries. This paper provides new stylized facts about the relationship between business cycles and inequality. We study the cross-correlations of filtered series of inequality, on the one side, and macro-economic variables (e.g. GDP, unemployment, inflation, etc), on the other. In addition, the analysis explores the Granger causality of such relationships. We use the RED database that allows to study the dynamics of different sources and measures of inequality in a subset of OECD countries. We find that inequality series are non stationary. At the business cycle frequencies, income inequality is counter-cyclical, while consumption inequality is pro-cyclical. We find a stronger correlation of the business cycle with inequality in the hours of work than with inequality in hourly wages. We find a considerable evidence of a two-way causality macroeconomic variables, on one side, and inequality at the business cycle frequencies.