On the Positive Correlation between Income Inequality and Unemployment
18 Pages Posted: 11 Feb 2014
Date Written: August 28, 2004
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 astationary 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.
Keywords: Unemployment, Gini, Inequality, Income Distribution, Unemployment, Critique
JEL Classification: JEL: J30, I30, D33
Suggested Citation: Suggested Citation