Working Paper: NBER ID: w16577
Authors: Jonathan A. Parker; Annette Vissing-Jorgensen
Abstract: We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality.
Keywords: income cyclicality; high-income households; top income shares; economic inequality
JEL Codes: D31; E24; E32; G3; H24; J31; M52; O32; O33; O57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income cyclicality (E32) | income shares (D33) |
| increased cyclicality of incomes (E32) | increased income share of top 1 percent (D33) |
| increases in income cyclicality (E32) | increases in income share (E25) |
| cyclicality of top incomes (E32) | income cyclicality (E32) |
| share of earned income (D33) | cyclicality of top incomes (E32) |
| income shares of top 1 percent (D33) | income cyclicality (E32) |
| cyclicality of post-tax, post-transfer income (H31) | cyclicality of high-income households (E32) |