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Income inequality in general equilibrium

Author

Listed:
  • Jochen Mankart

    (: Deutsche Bundesbank)

  • Romanos Priftis

    (European Central Bank)

  • Rigas Oikonomou

    (UC Louvain & University of Surrey)

Abstract

We develop a quantitative framework in which income inequality arises endogenously in response to productivity shocks. The framework accommodates sectoral inputoutput linkages, arbitrary elasticities of factors and intermediates, and heterogeneous workers that endogenously choose to supply their labor across sectors. Workers are imperfectly mobile across sectors, parameterized by a Roy-Frechet setup. We characterize the impact of Harrod-neutral shocks and changes in labor mobility on income inequality and welfare up to first- and second order. Inequality arises in equilibrium due to a combination of changes in income share and labor use across all sectors due to their dependencies in the input-output network. We calibrate the model using Belgian data and provide quantitative results, confirming strong non-linearities. These results suggest that labor market-improving policies can have strong effects on both welfare and inequality, but the impact is both quantitatively and qualitatively dependent on the structure of the economy and its initial equilibrium.

Suggested Citation

  • Jochen Mankart & Romanos Priftis & Rigas Oikonomou, 2022. "Income inequality in general equilibrium," Working Paper Research 417, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:202210-417
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    File URL: https://www.nbb.be/fr/articles/income-inequality-general-equilibrium
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    More about this item

    Keywords

    Income inequality; production networks; disaggregated macro models; wage gaps; mobility of workers; heterogeneous factors of production.;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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