The impact of aggregate fluctuations across the UK income distribution

In this paper, we examine the response of earnings and employment to fluctuations in aggregate economic activity (GDP) across the income distribution. Using data from the UK’s Labour Force Survey, we present evidence that aggregate fluctuations have economically significant but heterogeneous impacts across the income distribution. Sensitivity is greatest at the very bottom (first decile) of the income distribution and smallest in the upper middle (seventh and eight deciles) of the distribution. The transmission of GDP fluctuations also differs across the income distribution. Changes to hours worked and employment explain the majority of the labour earnings response in the bottom half of the distribution, whereas changes to the hourly wage are more important in the top half. In a further decomposition, we show that the changes to employment are largely due to fluctuations in the employment to unemployment transition rate. We also find that GDP fluctuations are positively correlated with job switching in the bottom half of the distribution.