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Earnings inequality and the business cycle

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  • Gadi Barlevy
  • Daniel Tsiddon

Abstract

Economists have long viewed recessions as contributing to increasing inequality. However, this conclusion is largely based on data from a period in which inequality was increasing over time. 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 more 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 Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-04-08.

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Date of creation: 2004
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Handle: RePEc:fip:fedhwp:wp-04-08

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Keywords: Business cycles ; Wages;

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Citations

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Cited by:
  1. Stéphane Bonhomme & Laura Hospido, 2012. "The cycle of earnings inequality: evidence from Spanish social security data," Banco de Espa�a Working Papers 1225, Banco de Espa�a.
  2. 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.
  3. Bordo, Michael D. & Meissner, Christopher M., 2012. "Does inequality lead to a financial crisis?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2147-2161.
  4. Manthos, Delis & Iftekhar, Hasan & Pantelis, Kazakis, 2010. "Bank regulations and income inequality: Empirical evidence," MPRA Paper 27379, University Library of Munich, Germany.
  5. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal we stand: an empirical analysis of economic inequality in the United States, 1967-2006," Staff Report 436, Federal Reserve Bank of Minneapolis.
  6. Peng, Fei & Kang, Lili, 2013. "Cyclical changes in the wage structure of the United Kingdom: a historical review of the GHS 1972-2002," MPRA Paper 47210, University Library of Munich, Germany.
  7. SAITO Yukiko & KOUNO Toshiaki, 2012. "Rising Wage Inequality Within Firms: Evidence from Japanese health insurance society data," Discussion papers 12039, Research Institute of Economy, Trade and Industry (RIETI).
  8. Gadi Barlevy, 2004. "On the Timing of Innovation in Stochastic Schumpeterian Growth Models," NBER Working Papers 10741, National Bureau of Economic Research, Inc.
  9. Chris Edmond & Laura Veldkamp, 2008. "Income Dispersion and Counter-Cyclical Markups," NBER Working Papers 14452, National Bureau of Economic Research, Inc.

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