Unequal growth

Francesco Lippi and Fabrizio Perri

Journal of Monetary Economics, 2023, vol. 133, issue C, 1-18

Abstract: Over the past 50 years, households in the United States have experienced changes in earnings dynamics that have resulted in a large increase in inequality. This paper assesses the impact of these changes on aggregate growth and welfare. We begin by inspecting a simple statistical decomposition of aggregate earnings growth using data from the Panel Study of Income Dynamics for the period 1967–2018. The decomposition expresses aggregate earnings growth as the sum of two terms. The first is the covariance between the level and growth of household earnings, which depends only on micro earnings dynamics. The second is the average growth across households, which depends on both micro and macro factors, such as a common labor productivity growth. In order to identify the impact of the changes in the micro dynamics on aggregate outcomes, we map a simple model of micro-founded growth onto the terms of the decomposition. We find that changes in households’ earnings dynamics that are consistent with the micro data imply unequal growth across the earnings distribution that is, a transition period during which there is a change in the shape of the distribution of incomes that is not mean preserving, so that aggregate growth is affected. This change yields a positive effect on aggregate growth and, with incomplete markets, an ex-ante negative welfare effect.

Keywords: Income distribution; Inequality; Growth slowdown (search for similar items in EconPapers)
JEL-codes: D31 O4 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:133:y:2023:i:c:p:1-18

DOI: 10.1016/j.jmoneco.2022.12.001

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