Income distribution and economic crises

This study presents an original empirical analysis of the relationship between income inequality and recession severity, measured by the length and depth of recessions. For this purpose, an extensive panel data set was constructed, whereby each observation corresponded to a recession episode. The empirical analysis yielded two novel findings. First, pre‐recession inequality and recession severity are weakly related to each other, as a negative and statistically significant relationship is only observed for middle and high levels of income and governance. Second, the relationship between recession length and post‐recession income inequality is positive and highly significant in low‐ and middle‐income countries. This relationship is insignificant in high‐income countries due, possibly, to their high capacity to accommodate for the impacted low‐income groups.