Business Cycles and Earnings Inequality

Byoungchan Lee

No 202001, HKUST CEP Working Papers Series from HKUST Center for Economic Policy

Abstract: I construct a novel, quarterly measure of earnings inequality and document the following facts. First, shocks to productivity and government expenditure have significant effects on earnings inequality, while monetary policy shocks have little effect.Second, unanticipated innovations in earnings inequality, summarizing redistributive forces from the bottom to the top, substantially lower aggregate demand in a U-shaped manner. Finally, the power of stabilization policies increases with the level of inequality. These empirical results are rationalized by a tractable two-agent model, featuring countercyclical earnings risk, an endogenous extensive margin of being credit constrained, and decreasing relative risk aversion preferences.

Keywords: business cycle; inequality; impulse response; forecast error variance decomposition; stabilization policy; marginal propensity to consume (search for similar items in EconPapers)
JEL-codes: D31 E21 E32 E52 E62 (search for similar items in EconPapers)
Date: 2020-04
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Citations: View citations in EconPapers (1)

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