Working Paper

Earnings inequality and the business cycle


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: Business cycles; Wages;

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Authors

    Barlevy, Gadi

    Tsiddon, Daniel

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2004

Number: WP-04-08