An inquiry into the relation between Business cycles and Income Inequality

Abstract

We evaluate the role of business cycles and some key economic indicators on income disparity within- and between municipalities. We decompose Norwegian mainland GDP between 2006-2017 to a cyclical and trend component and key macroeconomic variables which vary within municipalities. Using Mundlak’s correlated-random effects model we estimate the effect of the business cycle on official inequality measures, the Gini-coefficient and P90/P10. These measures are complemented by a set of individual income measures and fractiles constructed from pensionable- and general income which aims to capture distributional changes. We find that the business cycle is regressive within municipalities while the underlying trend component has an equalizing effect. The between-municipality effects are ambiguous, some evidence speak for a regressive behaviour of the trend component and from the estimated withinand contextual effects it is difficult to infer significant between-effects