Demand Composition and Income Distribution

Author/Editor:

David Pothier ; Damien Puy

Publication Date:

December 15, 2014

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 2014/224

Subject:

Employment Income Income distribution Income inequality Labor National accounts

English

Publication Date:

December 15, 2014

ISBN/ISSN:

9781498323888/1018-5941

Stock No:

WPIEA2014224

Pages:

50

Please address any questions about this title to publications@imf.org