Revisiting macroeconomic activity and income distribution in the USA

Abstract

We revisit the distributional implications of macroeconomic activity in the USA by estimating the effects of the unemployment and inflation rates on the quintile Lorenz ordinates. We have access to 16 years of additional data (1995–2010) that were not available for the earlier studies, covering the deepest recession since the Great Depression. These additional data do not substantively change the results regarding the effects of unemployment and inflation on income inequality (both increase it). Adding controls for other important macroeconomic variables that have increased substantially in recent decades (public transfers, government budget deficits, and openness to trade) also has little effect on the findings regarding unemployment and inflation. Changes in budget deficits are uniformly equalizing, and public transfers increase the share of the bottom 20% across different specifications. Greater openness to international trade increases inequality in some specifications but has little effect when we also include controls for public transfers and budget deficits.