The impact of aggregate fluctuations across the UK income distribution

Tomas Key (tomas.key@bankofengland.co.uk) and Jamie Lenney (jamie.lenney@bankofengland.co.uk)
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Tomas Key: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Jamie Lenney: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1083, Bank of England working papers from Bank of England

Abstract: In this paper, we examine the response of earnings and employment to fluctuations in aggregate economic activity (GDP) across the income distribution. Using data from the UK’s Labour Force Survey, we present evidence that aggregate fluctuations have economically significant but heterogeneous impacts across the income distribution. Sensitivity is greatest at the very bottom (first decile) of the income distribution and smallest in the upper middle (seventh and eight deciles) of the distribution. The transmission of GDP fluctuations also differs across the income distribution. Changes to hours worked and employment explain the majority of the labour earnings response in the bottom half of the distribution, whereas changes to the hourly wage are more important in the top half. In a further decomposition, we show that the changes to employment are largely due to fluctuations in the employment to unemployment transition rate. We also find that GDP fluctuations are positively correlated with job switching in the bottom half of the distribution.

Keywords: Distributional effects; business cycles; income dynamics; labour markets (search for similar items in EconPapers)
JEL-codes: E24 E32 J31 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2024-08-06
New Economics Papers: this item is included in nep-lma and nep-tid
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