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BPEA Article

The Increase in Income Cyclicality of High-Income Households and Its Relation to the Rise in Top Income Shares [with Comments and Discussion]

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Abstract

We document a large increase in the cyclicality of the incomes
of high-income households, coinciding with the rise in their share of aggregate
income. In the United States, since top income shares began to rise rapidly
in the early 1980s, incomes of those in the top 1 percent of the income distribution
have averaged 14 times average income and been 2.4 times more cyclical.
Before the early 1980s, incomes of the top 1 percent were slightly less cyclical
than average. The increase in cyclicality at the top is to a large extent due to
increases in the share and the cyclicality of their earned income. The high cyclicality
among top incomes is found for households without stock options; following
the same households over time; for post-tax, post-transfer income; and
for consumption. We study cyclicality throughout the income distribution and
reconcile our findings with earlier work. Furthermore, greater top income share
is associated with greater top income cyclicality across recent decades, across
subgroups of top income households, and, in changes, across countries. This
suggests a common cause. We show theoretically that increases in the production
scale of the most talented can raise both top incomes and their cyclicality.

Authors

Commenters

Rebecca M. Blank

Former Brookings Expert

Chancellor - University of Wisconsin-Madison

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