Macroeconomic Conditions and the Size Distribution of Income: Evidence from the United Kingdom

Abstract

In order to understand observed changes over time in the size distribution of personal income, the influence of macroeconomic conditions must be explored. Only by tracing these shorter-term influences can we distinguish the longer-term structural factors that are also at work in altering the distribution. In addition, it is of crucial importance in the assessment of macroeconomic policy to know how the costs and benefits of macroeconomic developments and alternative policy responses are distributed. This article presents an analysis of the main factors linking macroeconomic conditions and the size distribution of income, based on data for the United Kingdom. This proves to be a particularly appropriate case for study, with dramatic changes in both the macroeconomy and the size distribution in recent years, and also with a database that permits a variety of approaches to the problem. The paper begins by outlining the major channels whereby changes in the macroeconomy are likely to feed through to the size distribution of income, and the approaches taken in previous analyses of this relationship-almost all based on U.S. data. Section 3 looks at one of these approaches, the analysis of time-series data on macroeconomic aggregates and the income distribution, and presents results for the United Kingdom corresponding to those for the United States produced by The author is a researcher at the Economic and Social Research Institute, 4 Burlington Road, Dublin 4, Ireland.