Wednesday, January 2, 2013

Strange facts about inequality over the business cycle

The last recession has renewed interest about the distributional impact of business cycles. Clearly, not everyone is affected in the same way by a recession, and the massive policy interventions of the last few years also affected people differentially. For example, what what do we really know about the dynamics of inequality?

Virginia Maestri and Andrea Roventini use the database from a special issue of the Review of Economic Dynamics (which I discussed before). While the sample length is unavoidably short, including only a couple of recessions for every considered country, some general lessons can be learned: income inequality is counter-cyclical while consumption inequality is pro-cyclical. That is going to be tough to replicate in a theory. Imagine a recession. I can imagine that inequality becomes more severe because the people how typically have low incomes are more likely to lose their job. But why would consumption inequality be reduced? Unemployed workers do have lower consumption, and may in fact be more severely affected due to the lack of appropriate savings. So it must be that the consumption of the richer ones drops like a stone, and I do not see a model delivering this.

PS: I realize there was a large drop in income for the richest ones in this recession, and they recovered quickly. But this was not a typical recession.

PS2: And I still hate it when a paper starts on page 9, and the six last pages are back-cover material. What a waste.

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