Unemployment spells and income distribution dynamics

Abstract

In the U.S., during the 1948-86 period, an approximation to the Gini Index based on the quintiles and on the top 5% of the income distribution yielded a value of 0.351. Further, during this same period, the income share earned by the first quintile was procyclical and 7% more volatile than aggregate yearly output. In this paper we quantify the role played by unemployment spells in determining these and other related issues. To this purpose, we use an extension of the general equilibrium stochastic growth model that includes an endogenous distribution of households indexed by wealth and employment status. Our main findings are the following: i) in a model economy where all households have the same endowments of skills and are subject to the same employment processes, uninsured unemployment spells alone account for a very small share of the concentration of income observed in the U.S., and of the income distribution dynamics -the approximated Gini Index in this model economy is 18% of the one observed in the U.S., and the income share earned by the first quintile is 58% more volatile, ii) this result is robust to including a technology that allows for cyclically moving factor shares, and iii) in a model economy where households are partitioned into different skills groups that are subject to different employment processes in accordance to U.S. data, unemployment spells account for a significantly greater share of the U.S. statistics -the approximated Gini Index in this model economy is 70% of the one observed in the U.S., and the income share earned by the first quintile is 10% more volatile.