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Earnings Inequality and the Business Cycle

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Listed author(s):
  • 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10469.

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Date of creation: May 2004
Publication status: published as Barlevy, Gadi and Daniel Tsiddon. "Earnings Inequality And The Business Cycle," European Economic Review, 2006, v50(1,Jan), 55-89.
Handle: RePEc:nbr:nberwo:10469
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Find related papers by JEL classification:
  • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
  • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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Cited by:

  1. Stéphane Bonhomme & Laura Hospido, 2012. "The cycle of earnings inequality: evidence from Spanish social security data," Working Papers 1225, Banco de España;Working Papers Homepage.
  2. ARATA Yoshiyuki, 2017. "A Functional Linear Regression Model in the Space of Probability Density Functions," Discussion papers 17015, Research Institute of Economy, Trade and Industry (RIETI).
  3. Manthos D. Delis & Iftekhar Hasan & Pantelis Kazakis, 2014. "Bank Regulations and Income Inequality: Empirical Evidence," Review of Finance, European Finance Association, vol. 18(5), pages 1811-1846.
  4. Tyrowicz, Joanna & Van der Velde, Lucas & Svejnar, Jan, 2016. "Effects of Labor Reallocation on Productivity and Inequality: Insights from Studies on Transition," IZA Discussion Papers 10229, Institute for the Study of Labor (IZA).
  5. 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.
  6. 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.
  7. Edmond, Chris & Veldkamp, Laura, 2009. "Income dispersion and counter-cyclical markups," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 791-804, September.
  8. 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.
  9. 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.
  10. Diana Alessandrini & Stephen Kosempel & Alessandra Pelloni & Thanasis Stengos, 2016. "Earnings inequality, the business cycle, and the life cycle," Working Papers 1602, University of Guelph, Department of Economics and Finance.
  11. 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).
  12. Gadi Barlevy, 2004. "On the timing of innovation in stochastic Schumpeterian growth models," Working Paper Series WP-04-11, Federal Reserve Bank of Chicago.
  13. Juan Guerra-Salas, 2016. "Fiscal Policy, Sectoral Allocation, and the Skill Premium: Explaining the Decline in Latin America’s Income Inequality," Working Papers Central Bank of Chile 779, Central Bank of Chile.

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