Income Inequality and Job Creation

Sebastian Doerr, Thomas Drechsel and Donggyu Lee

No 1021, Staff Reports from Federal Reserve Bank of New York

Abstract: We propose a novel channel through which rising income inequality affects job creation and macroeconomic outcomes. High-income households save relatively more in stocks and bonds but less in bank deposits. A rising top income share thereby increases the relative financing cost for bank-dependent firms, which in turn create fewer jobs. Exploiting variation in top income shares across US states and an instrumental variable strategy, we provide evidence for this channel. We then build a general equilibrium macro model with heterogeneous households and heterogeneous firms and calibrate it to our empirical estimates. The model shows that the secular rise in top incomes accounts for 13 percent of the decline in the employment share of small firms since 1980. Through the new channel, rising inequality also reduces the labor share and aggregate output. Model experiments show that ignoring the link between inequality and job creation understates welfare effects of income redistribution.

Keywords: income inequality; household heterogeneity; bank lending; job creation; business dynamism (search for similar items in EconPapers)
JEL-codes: D22 D31 E44 L25 (search for similar items in EconPapers)
Pages: 75
Date: 2022-06-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg and nep-lma
Note: Revised November 2024.
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Citations: View citations in EconPapers (2)

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Working Paper: Income Inequality and Job Creation (2024)
Working Paper: Income Inequality and Job Creation (2022)
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