Stylized Facts on the Interaction between Income Distribution and the Great Recession

Abstract

There are several narratives connecting the financial crisis - as well as the Great Depression of the 1930s - with the functional or personal income distribution and its pre-crisis movements. The paper investigates whether this claim can be supported with evidence showing that the crisis was deeper in countries in which incomes were more polarized or where wage shares were lower. Empirical evidence for 37 mainly industrialized countries does not generally support the hypothesis that either the level of or the change in distribution was closely linked to the performance of a country during the crisis. Some evidence shows a tentatively improved performance if wage shares as well as polarization decreased. Declining wage shares could have increased the resilience of firms in the crisis; the lower income differences may have bolstered consumption of domestic goods. The existence of more compelling evidence for the impact of distribution on the crisis may have been diluted by the global character of economies. Savings in one country or region can lead to low interest rates as well as financial or real investment in other regions via international capital flows which might stop abruptly in the crisis.