Demand Composition and Income Distribution

December 15, 2014

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Format: Chicago

David Pothier, and Damien Puy. Demand Composition and Income Distribution, (USA: International Monetary Fund, 2014) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper highlights how changes in the composition of demand affect income dispersion in the short run. We first document how the share of aggregate spending dedicated to labour-intensive goods and services shrinks (expands) during downturns (booms), and argue that this contributes to the observed pro-cyclicality of employment and output in labour-intensive industries. Using a two-sector general equilibrium model, we then assess how this demand composition channel influences the cyclical properties of the income distribution. Consistent with empirical evidence, we find income inequality to be countercyclical due to changes in the level of employment and (to a lesser extent) relative factor prices. The model also shows that wealth redistribution policies can potentially involve a trade-off between equality and output, depending on how they affect the composition of aggregate demand.

Subject: Employment, Income, Income distribution, Income inequality, Labor, National accounts

Keywords: Affect output, Aggregate income, Business cycle, Demand composition, Distribution function, Employment, Factor intensity, Factor of production, Gini coefficient, Income, Income change, Income distribution, Income distribution result, Income Gini coefficient, Income inequality, Income share, Interest rate, Labor income, Macroeconomic performance, Productivity effect, Productivity shock, Wage-interest rate ratio, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/224
Stock No:

WPIEA2014224
ISBN:

9781498323888
ISSN:

1018-5941

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