The Long Inequality Shadow of Unemployment

• In Event: 375 - Regular Session. Labor Market

Abstract

Although a causal relationship between unemployment and economic inequality might seem self-evident to the public, there is little support for it in current empirical research. In view of the Great Recession in much of the affluent world, the present paper re-examines the issue from a theoretical and empirical angle. The paper presents a range of considerations that suggest the presence of important time lags in the effects of unemployment on inequality, but also that the contemporaneous correlation of unemployment and economic inequality might be low as an intended consequence of welfare state institutions. Using a cohort design, time-series cross-sectional data on working-age respondents from 22 Western countries from waves I-VIII (1967-2010) of the Luxembourg Income Study and fixed-effects distributed-lag panel data modeling, the paper finds a consistent but modest contemporaneous relationship between unemployment and inequality measured by household disposable incomes. This contemporaneous relationship is markedly stronger if measured by the inequality of household market incomes or earnings, suggesting that welfare states are indeed able to considerably mitigate the unemployment-inequality nexus. At the same time, the contemporaneous unemployment-inequality relationship is dwarfed by important time lags in the impact of unemployment on inequality, operating through scarring effects in adult work life, through changing wage distributions and through the persistent effects of labor market conditions at labor market entry, which all contribute to create a long inequality shadow of unemployment. As far as the available data permit to tell, the early stages of the current Great Recession have largely followed these historical patterns.

Author

• Markus Gangl, J.W.Goethe University Frankfurt am Main