Recession causes inequality ‘double whammy’ – research

Recessions are a key factor driving increased inequality in the US, as they impose a “double whammy” on the poorest members of society, new research finds.

Jonathan Heathcote, Fabrizio Perri and Giovanni Violante study the evolution of inequality in earning among “prime-age men” in the US over the period from 1968 to 2018. In the working paper, published by the National Bureau of Economic Research, they highlight a “strong cyclical component to the dynamics of earnings inequality” at the lower end of the distribution.

They go on to decompose the data into hourly wages and hours worked. At the top end, most men work full time, so changes in wages drive differences in earnings. But at the bottom end, part-time work is common and changes in hours are more important.

“This empirical evidence suggests an intriguing possibility – namely, that some of the observed long-run increase in inequality at the bottom of the earnings distribution reflects the cumulative impact of a series of recessions,” the authors say.

With this in mind, they set out a model of what might be at work. When a recession strikes, low-skilled men are the most likely to be made unemployed. Those who lose jobs see their skills erode, further worsening their potential earnings. These men are likely to drop out of the labour market, leading to persistently high earnings inequality.