We document the business cycle behavior of the US income distribution and explore the extent to which unemployment spells and cyclically-moving factor shares account for this behavior by analyzing four heterogeneous household extensions of the neoclassical growth model. We conclude (i) that partitioning the population into five types subject to type-specific employment processes seems to be enough to account for most aspects of the US income distribution business cycle dynamics, (ii) that the role played by cyclically-moving factor shares is small, and (iii) that the income distribution business cycle dynamics may be essentially independent from the significant part of the observed wealth concentration that these model worlds fail to account for.
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We are grateful for the comments of Paul Gomme, Ed Green, Robert Lucas, Per Krusell, Albert Marcet, Ed Prescott, Vincenzo Quadrini, Richard Rogerson, Randy Wright, Stan Zin and an anonymous referee. We also thank the participants at the NBER Summer Institute, Northwestern Conference in Applied General Equilibrium, and the seminars at the Institute for International Economic Studies, University of Pennsylvania and Universitat Pompeu Fabra (twice). Dı́az-Giménez thanks the DGICYT for grant PB-34567. Rı́os-Rull thanks the National Science Foundation for grant SBR-9309514. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
- Income distribution fluctuations