Inequality and the business cycle: evidence from U.S. survey data

Martin Geiger, Eric Mayer and Johann Scharler

Applied Economics, 2020, vol. 52, issue 31, 3418-3435

Abstract: We study the effects of macroeconomic shocks on measures of economic inequality obtained from U.S. survey data. To identify aggregate supply, aggregate demand, and monetary policy shocks, we estimate vector autoregressions and impose sign and zero restrictions on impulse response functions. We find that the effects of the macroeconomic shocks on inequality depend on the type of shock as well as on the measure of inequality considered. Contractionary monetary policy shocks increase expenditure and consumption inequality, whereas income and earnings inequality are less affected. Adverse aggregate supply and demand shocks increase income and earnings inequality, but reduce expenditure and consumption inequality. Our results suggest that different channels dominate in the transmission of the shocks. The earnings heterogeneity channel is consistent with the inequality dynamics after monetary policy shocks, but it appears to be less crucial when the economy is hit by either aggregate supply or aggregate demand shocks. Using variance decompositions, we find that although the macroeconomic shocks account for large shares of the variation in the macroeconomic variables, their contributions to the dynamics of the inequality measures are limited.

Date: 2020
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Working Paper: Inequality and the Business Cycle: Evidence from U.S. survey data (2019)
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DOI: 10.1080/00036846.2020.1711508

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