Top income shares, inequality, and business cycles: United States, 1957–2016

Abstract

To study the causes and consequences of cyclical fluctuations in labor and capital income inequality through structural lenses, I develop and estimate a TANK model featuring business and inequality cycles. Matching the top 10% compensation and capital income shares disciplines distributional implications of the model, and reveals aggregate implications of heterogeneity. In a setup with aggregate and agent-type specific forces, cycles in income inequality and top income shares are to a large extent the outcome of aggregate forces, operating via heterogeneity in skills, labor market institutions, and investment opportunities. Inequality influences the relative importance of aggregate forces in output cycles, links investment to labor market conditions, disaggregates labor market cycles, and amplifies the effect of shocks causing counter-cyclical inequality.