Heterogeneous effects of economic cycles across the income distribution: A common factor model approach

Pourya Valizadeh, Akash Issar and Henry Bryant

Economics Letters, 2025, vol. 251, issue C

Abstract: We extend the work of Bitler and Hoynes (2015), which uses state-level panel data and a two-way fixed effects (TWFE) model to examine the heterogeneous effects of economic cycles across the household income distribution. Using a more flexible common factor model that allows common shocks to have differential effects across states, we find statistically and economically significant differences from TWFE estimates, particularly at the lower tail of the income distribution. While TWFE estimates suggest a hump-shaped pattern — where effects are smaller at the lower and upper tails — our estimates indicate that cyclical impacts are largest at the lowest income levels and decline monotonically as income rises. These results suggest that conventional TWFE models may understate the vulnerability of lowest-income households to economic downturns.

Keywords: Economic cycles; Income distribution; State-level panel data; Two-way fixed effects model; Common factor model (search for similar items in EconPapers)
JEL-codes: C13 C23 D31 E32 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176525001399
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:251:y:2025:i:c:s0165176525001399

DOI: 10.1016/j.econlet.2025.112302

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().