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Personal Income Inequality and Aggregate Demand

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  • Laura Carvalho
  • Armon Rezai

Abstract

This paper presents a theoretical and empirical investigation of how changes in the size distribution of income can affect aggregate demand and the demand regime of an economy. After presenting empirical evidence for the US economy that the propensity to save increases significantly from the bottom to the top quintile of wage earners, we demonstrate that more equal distributions always lead to higher output in the traditional neo-Kaleckian macroeconomic model. We also present conditions under which a reduction of income inequality among workers turns demand more wage-led. This view is supported by the results of an econometric study for the United States (1967-2010) which show that the rise after 1980 in income inequality has made the US economy more profit-led.

Suggested Citation

  • Laura Carvalho & Armon Rezai, 2014. "Personal Income Inequality and Aggregate Demand," Working Papers, Department of Economics 2014_23, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2014wpecon23
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    References listed on IDEAS

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    More about this item

    Keywords

    Income inequality; demand regimes; Neo-Kaleckian model; personal and functional income distribution;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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