Disaggregating the Effect of the Business Cycle on the Distribution of Income

Abstract

This paper disaggregates total household income into a complete set of components and studies the comparative cyclicality of these components to economic growth. Comparisons of the relative responsiveness to GNP growth of wages, hours of work, and total labor market income of heads and wives, and transfer income sources of households are made across income, race, sex and age groups. This provides a picture of the channels by which economic growth produces income change. Significant differences in elasticities are found to exist both between different income components and between different population groups for the same components. The narrowing income distribution in times of high growth occurs primarily because of large elasticities on head's labor market income among the poor. Both wages and hours show evidence of cyclicality. The labor market earnings of women -- both wives and household heads -- are far less responsive to growth. Cyclicality in transfer income varies enormously between population groups and by type of transfer.