Unemployment and Income Inequality: A Puzzling Finding from the US in 1941-2010

Abstract

Persisting high unemployment and income inequality are two serious problems in global macroeconomic management. This paper sets out to explore the possible connection behind the co-existence of the two problems with an empirical study of the US from 1941-2010. Using the wage share in aggregate personal income as a measurement of income inequality, it discovers a puzzle that is against common sense and conventional belief: there is a robust tradeoff relationship between the change rates of unemployment rate and the wage share throughout 1941-2010. It means that unemployment and income inequality are positively correlated. By making the distinction between the wage income from the primary distribution and employees’ welfare incomes from government transfer payments, it also finds that employees’ social welfare had a weak positive relationship with unemployment.