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Earnings inequality, the business cycle, and the life cycle

Listed author(s):
  • Diana Alessandrini

    ()

    (Department of Economics, Auburn University)

  • Stephen Kosempel

    ()

    (Department of Economics and Finance, University of Guelph)

  • Alessandra Pelloni

    ()

    (Department of Economics, University of Rome ``Tor Vergata'')

  • Thanasis Stengos

    ()

    (Department of Economics and Finance, University of Guelph)

We investigate the relationship between short run macroeconomic conditions and earnings inequality. In our empirical work we establish a set of stylized facts: (1) earnings inequality is counter-cyclical; (2) the bottom quintile of the earnings distribution is the most volatile; (3) business cycles have a low or no impact on wage inequality, but they have a strong impact on hours worked inequality; and (4) the impact of an economic contraction on inequality is weaker in economies with higher levels of education. Then, to explain these observations we develop a stochastic Ben-Porath model of human capital accumulation with life cycle dynamics.

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File URL: http://www.uoguelph.ca/economics/repec/workingpapers/2016/2016-02.pdf
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Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 1602.

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Length: 44 pages
Date of creation: 2016
Handle: RePEc:gue:guelph:2016-02
Contact details of provider: Postal:
Guelph, Ontario, N1G 2W1

Phone: (519) 824-4120 ext. 53898
Fax: (519) 763-8497
Web page: https://www.uoguelph.ca/economics/

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  1. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  2. Alessandrini, Diana & Kosempel, Stephen & Stengos, Thanasis, 2015. "The business cycle human capital accumulation nexus and its effect on hours worked volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 356-377.
  3. Virginia Maestri & Roventini, A. (Andrea), 2012. "GINI DP 30: Stylized Facts on Business Cycles and Inequality," GINI Discussion Papers 30, AIAS, Amsterdam Institute for Advanced Labour Studies.
  4. Simon C. Parker, 1999. "Income Inequality and the Business Cycle: A Survey of the Evidence and Some New Results," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 21(2), pages 201-225, January.
  5. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc.
  6. Barlevy, Gadi & Tsiddon, Daniel, 2006. "Earnings inequality and the business cycle," European Economic Review, Elsevier, vol. 50(1), pages 55-89, January.
  7. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  8. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-467, June.
  9. Simon Kuznets & Elizabeth Jenks, 1953. "Shares of Upper Income Groups in Income and Savings," NBER Books, National Bureau of Economic Research, Inc, number kuzn53-1.
  10. Dirk Krueger & Fabrizio Perri & Luigi Pistaferri & Giovanni L. Violante, 2010. "Cross Sectional Facts for Macroeconomists," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 1-14, January.
  11. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-2954, December.
  12. David N. DeJong & Beth F. Ingram, 2001. "The Cyclical Behavior of Skill Acquisition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 536-561, July.
  13. Huggett, Mark & Ventura, Gustavo & Yaron, Amir, 2006. "Human capital and earnings distribution dynamics," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 265-290, March.
  14. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352-352.
  15. Hansen, Gary D. & Imrohoroglu, Selahattin, 2009. "Business cycle fluctuations and the life cycle: How important is on-the-job skill accumulation?," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2293-2309, November.
  16. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  17. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 83-114, June.
  18. Hoover, Gary A. & Giedeman, Daniel C. & Dibooglu, Sel, 2009. "Income inequality and the business cycle: A threshold cointegration approach," Economic Systems, Elsevier, vol. 33(3), pages 278-292, September.
  19. Rodolfo E. Manuelli & Ananth Seshadri, 2009. "Explaining International Fertility Differences," The Quarterly Journal of Economics, Oxford University Press, vol. 124(2), pages 771-807.
  20. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  21. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
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