Working Paper: CEPR ID: DP14870
Authors: Jonathan Heathcote; Fabrizio Perri; Giovanni L. Violante
Abstract: We document that declining hours worked are the primary driver of widening inequalityin the bottom half of the male labor earnings distribution in the United Statesover the past 52 years. This decline in hours is heavily concentrated in recessions:hours and earnings at the bottom fall sharply in recessions and do not fully recoverin subsequent expansions. Motivated by this evidence, we build a structural modelto explore the possibility that recessions cause persistent increases in inequality; thatis, that the cycle drives the trend. The model features skill-biased technical change,which implies a trend decline in low-skill wages relative to the value of non-marketactivities. With this adverse trend in the background, recessions imply a potentialdouble-whammy for low skilled men. This group is disproportionately likely to experienceunemployment, which further reduces skills and potential earnings via a scarringeffect. As unemployed low skilled men give up job search, recessions generatesurges in non-participation. Because non-participation is highly persistent, earningsinequality remains elevated long after the recession ends.
Keywords: earnings; losses upon displacement; non-participation; recession; skill-biased technological change; zero earnings
JEL Codes: E24; E32; J24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Avoiding Recessions (E32) | Lower Earnings Inequality (J31) |
| Recessions (E32) | Increased Unemployment among Low-Skilled Workers (F66) |
| Increased Unemployment among Low-Skilled Workers (F66) | Skill Loss (J24) |
| Skill Loss (J24) | Reduced Labor Market Participation (J22) |
| Reduced Labor Market Participation (J22) | Increased Earnings Inequality (J31) |
| Recessions (E32) | Skill Depreciation (J24) |
| Skill Depreciation (J24) | Increased Non-Participation in Labor Market (J29) |
| Increased Non-Participation in Labor Market (J29) | Increased Earnings Inequality (J31) |
| Recessions (E32) | Persistent Increases in Inequality (D31) |
| Cyclical Unemployment + Skill-Biased Technical Change (J64) | Long-Run Increase in Fraction of Men with Zero Earnings (J79) |