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Earnings Inequality and the Business Cycle

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  • 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
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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. Chris Edmond & Laura Veldkamp, 2008. "Income Dispersion and Counter-Cyclical Markups," NBER Working Papers 14452, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. repec:hhs:bofrdp:2012_018 is not listed on IDEAS
  5. Delis, Manthos D. & Hasan, Iftekhar & Kazakis, Pantelis, 2012. "Bank regulations and income inequality : Empirical evidence," Research Discussion Papers 18/2012, Bank of Finland.
  6. Stéphane Bonhomme & Laura Hospido, 2012. "The Cycle Of Earnings Inequality: Evidence From Spanish Social Security Data," Working Papers wp2012_1209, CEMFI.
  7. 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.
  8. 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.
  9. 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).
  10. 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.
  11. 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.
  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.

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