This paper attempts to analyse, in a theoretical perspective, the effects of economic fluctuations on the personal distribution of incomes. The framework developed here is logically separated into two building blocks. The first is a macrodynammic model determining wages and profits, I.e. the functional income distribution. The second is a set of 'entitlement rules', regulating the assignment of wages and profits to people and, hence, the personal income distribution. This admittedly artificial separation has the advantage of providing an approach that can, in principle, be applied to different models of the trade cycle, and of highlighting the arbitrariness of the choice of the entitlement rules, whose main determinants are social and historical factors. This analytical framework is applied to Goodwin's growth cycle model. Changes in income distribution are examined by means of two criteria: the Lorenz dominance and the Gini coefficient. The result of this paper show that inequality is unambiguously affected by economic fluctuations only over certain phases of the business cycle, while in the other phases Lorenz curves cross. This can partly explain why empirical evidence on this issue is rather mixed. On the other hand, the loose positive relationship between inequality and unemployment confirms one of the few regularities found in empirical research.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0084.