Income Inequality and Redistribution in the Aftermath of the 2007-2008 Crisis: The US Case

Abstract

This paper provides a detailed empirical assessment of the evolution of income inequality and the redistributive effects of the tax and transfer system following the 2007-2008 crisis. It focuses on the US case, drawing on data from the Current Population Survey for the period 2007-2012. Contrary to most existing studies, it looks at several sections of the income distribution, allowing for a clear picture of the heterogeneous consequences of the crisis. Furthermore, it analyses the disaggregated effects of different redistributive mechanisms, as opposed to focusing solely on their overall effect. Finally, it provides estimates covering the recovery period while most of the literature so far has mainly focused on the Great Recession years. Results show that although the crisis implied income losses across the whole income distribution, the burden was disproportionately born by low to middle income groups. Income losses experienced by richer households were relatively modest and transitory, while those experienced by poorer households were not only strong but also highly persistent. Taxes and transfers had a crucial role in taming an increase in income inequality in the immediate aftermath of the crisis, and during the GR years. Since 2010, however, their effect has been weaker and income inequality has experienced a new surge. The findings of this paper contribute to a better understanding of the distributional consequences of aggregate crises and the role of tax and transfer policies in stabilising the income distribution in a crisis aftermath.