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On the positive correlation between income inequality and unemployment

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  • Cysne, Rubens Penha

Abstract

Several empirical studies in the literature have documented the existence of a positive correlation between income inequalitiy and unemployment. I provide a theoretical framework under which this correlation can be better understood. The analysis is based on a dynamic job search under uncertainty. I start by proving the uniqueness of a stationary distribution of wages in the economy. Drawing upon this distribution, I provide a general expression for the Gini coefficient of income inequality. The expression has the advantage of not requiring a particular specification of the distribution of wage offers. Next, I show how the Gini coefficient varies as a function of the parameters of the model, and how it can be expected to be positively correlated with the rate of unemployment. Two examples are offered. The first, of a technical nature, to show that the convergence of the measures implied by the underlying Markov process can fail in some cases. The second, to provide a quantitative assessment of the model and of the mechanism linking unemployment and inequality.

Suggested Citation

  • Cysne, Rubens Penha, 2004. "On the positive correlation between income inequality and unemployment," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 561, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    • Handle: RePEc:fgv:epgewp:561
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    1. Levine, Daniel B & Singer, Neil M, 1970. "The Mathematical Relation Between the Income Density Function and the Measurement of Income Inequality," Econometrica, Econometric Society, vol. 38(2), pages 324-330, March.
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    3. Beach, Charles M, 1977. "Cyclical Sensitivity of Aggregate Income Inequality," The Review of Economics and Statistics, MIT Press, vol. 59(1), pages 56-66, February.
    4. Blinder, Alan S & Esaki, Howard Y, 1978. "Macroeconomic Activity and Income Distribution in the Postwar United States," The Review of Economics and Statistics, MIT Press, vol. 60(4), pages 604-609, November.
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    Cited by:

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    3. Jianu, Ionuț & Tudorache, Maria-Daniela & Nicolescu, Andreea Florentina, 2024. "Investigating the effects of education and labour market challenges on income inequality," EconStor Conference Papers 289591, ZBW - Leibniz Information Centre for Economics.
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    10. Cysne, Rubens Penha, 2004. "Towards a measure of income inequality freed from the volatility caused by variations in the rate of unemployment," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 560, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
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    13. Ogede Jimoh S., 2020. "Deconstructing the Impact of Entrepreneurship on Income Inequality in Sub-Saharan Africa Countries," Economics and Business, Sciendo, vol. 34(1), pages 273-284, February.
    14. Pizzo, Alessandra & Villena-Roldán, Benjamin, 2024. "Labor markets, wage Inequality, and hiring selection," MPRA Paper 120281, University Library of Munich, Germany.
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    17. Monika Anna Wesołowska, 2024. "Nierówności dochodowe w krajach postsocjalistycznych – analiza wybranych determinant," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 73-90.
    18. Kim, Dong-Hyeon & Lin, Shu-Chin, 2023. "Income inequality, inflation and financial development," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 468-487.
    19. Bebonchu Atems & Grayden Shand, 2018. "An empirical analysis of the relationship between entrepreneurship and income inequality," Small Business Economics, Springer, vol. 51(4), pages 905-922, December.
    20. Beatriz Larraz & Jose M. Pavía & Marcos Herrera‐Gómez, 2021. "Spatial aggregation and resampling expansion of big surveys: An analysis of wage inequality," Regional Science Policy & Practice, Wiley Blackwell, vol. 13(3), pages 957-981, June.
    21. Horowitz, Andrew W. & Flôres Junior, Renato Galvão, 2004. "Beyond indifferent players: on the existence of prisoners dilemmas in games with amicable and adversarial preferences," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 576, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    22. Ane-Mari Androniceanu & Irina Georgescu & Manuela Tvaronavičienė & Armenia Androniceanu, 2020. "Canonical Correlation Analysis and a New Composite Index on Digitalization and Labor Force in the Context of the Industrial Revolution 4.0," Sustainability, MDPI, vol. 12(17), pages 1-20, August.
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    24. Tan, Yan & Uprasen, Utai, 2023. "Asymmetric effects of oil price shocks on income inequality in ASEAN countries," Energy Economics, Elsevier, vol. 126(C).

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