Working Paper: NBER ID: w10469
Authors: 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.
Keywords: Earnings Inequality; Business Cycle; Recessions
JEL Codes: E3; J2; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Recessions (E32) | Amplification of long-run trends in earnings inequality (J70) |
| Long-run trends in earnings inequality (rising) (D31) | More rapid increases in earnings disparities (J31) |
| Long-run trends in earnings inequality (declining) (J70) | More rapid decline in earnings disparities (F62) |
| Cyclical nature of earnings inequality (D31) | Depends on direction of long-run trends (E32) |
| Technological changes (O33) | Impact on skill accumulation and earnings distribution (F66) |