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On the positive correlation between income inequality and unemployment

  • Cysne, Rubens Penha

Several empirical studies in the literature have documented the existence of a positive correlation between income inequalitiy and unemployment. I provide a theoretical framework under which this correlation can be better understood. The analysis is based on a dynamic job search under uncertainty. I start by proving the uniqueness of a stationary distribution of wages in the economy. Drawing upon this distribution, I provide a general expression for the Gini coefficient of income inequality. The expression has the advantage of not requiring a particular specification of the distribution of wage offers. Next, I show how the Gini coefficient varies as a function of the parameters of the model, and how it can be expected to be positively correlated with the rate of unemployment. Two examples are offered. The first, of a technical nature, to show that the convergence of the measures implied by the underlying Markov process can fail in some cases. The second, to provide a quantitative assessment of the model and of the mechanism linking unemployment and inequality.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 561.

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Date of creation: 01 Aug 2004
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Handle: RePEc:fgv:epgewp:561
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  1. J. J. McCall, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, Oxford University Press, vol. 84(1), pages 113-126.
  2. Beach, Charles M, 1977. "Cyclical Sensitivity of Aggregate Income Inequality," The Review of Economics and Statistics, MIT Press, vol. 59(1), pages 56-66, February.
  3. Nolan, Brian, 1986. "Unemployment and the Size Distribution of Income," Economica, London School of Economics and Political Science, vol. 53(212), pages 421-45, November.
  4. Blinder, Alan S & Esaki, Howard Y, 1978. "Macroeconomic Activity and Income Distribution in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 604-09, November.
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