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Earnings Inequality and the Business Cycle

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Author Info
Barlevy, Gadi
Tsiddon, Daniel

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Abstract

Economists have long viewed recessions as contributing to increasing inequality. This conclusion is largely based on data from a period in which inequality was increasing over time, however. This Paper examines the connection between long-run trends and cyclical variation in earnings inequality. We develop a model in which cyclical and trend inequality are related, and find that in our model, recessions tend to amplify long-run trends, i.e. they involve more rapidly increasing inequality when long-run inequality is increasing, and more rapidly decreasing inequality when long-run inequality is decreasing. In support of this prediction, we present evidence that during the first half of the 20th century when earnings inequality was generally declining, earnings disparities indeed appeared to fall more rapidly in downturns, at least among workers at the top of the earnings distribution.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4451.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4451

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Related research
Keywords: business cycles; great depression; human capital; income inequality; stochastic Ben Porath model; wage inequality;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative
N30 - Economic History - - Labor and Consumers, Demography, Education, Income, and Wealth - - - General, International, or Comparative
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tom Krebs, 2006. "Multi-Dimensional Risk and the Cost of Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 640-658, October. [Downloadable!] (restricted)
  2. Gadi Barlevy, 2004. "On the Timing of Innovation in Stochastic Schumpeterian Growth Models," NBER Working Papers 10741, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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