The transmission of uncertainty shocks on income inequality: State-level evidence from the United States

Fischer, Manfred M. ORCID: https://orcid.org/0000-0002-0033-2510 and Huber, Florian ORCID: https://orcid.org/0000-0002-2896-7921 and Pfarrhofer, Michael ORCID: https://orcid.org/0000-0002-0168-688X (2018) The transmission of uncertainty shocks on income inequality: State-level evidence from the United States. Working Papers in Regional Science, 2018/06. WU Vienna University of Economics and Business, Vienna.

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Abstract

In this paper, we explore the relationship between state-level household income inequality and macroeconomic uncertainty in the United States. Using a novel large-scale macroeconometric model, we shed light on regional disparities of inequality responses to a national uncertainty shock. The results suggest that income inequality decreases in most states, with a pronounced degree of heterogeneity in terms of shapes and magnitudes of the dynamic responses. By contrast, some few states, mostly located in the West and South census region, display increasing levels of income inequality over time. We find that this directional pattern in responses is mainly driven by the income composition and labor market fundamentals. In addition, forecast error variance decompositions allow for a quantitative assessment of the importance of uncertainty shocks in explaining income inequality. The findings highlight that volatility shocks account for a considerable fraction of forecast error variance for most states considered. Finally, a regression-based analysis sheds light on the driving forces behind differences in state-specific inequality responses.

Item Type:	Paper
Additional Information:	The authors gratefully acknowledge financial support from the Austrian National Bank, Jubilaeumsfond grant no.17650.
Keywords:	income distribution, inequality, uncertainty shocks, US states, global vector autoregressive model
Classification Codes:	JEL C11, C30, E3, D31
Divisions:	Departments > Sozioökonomie
Depositing User:	Gertraud Novotny
Date Deposited:	21 Jun 2018 17:03
Last Modified:	02 Sep 2020 15:30
FIDES Link:	https://bach.wu.ac.at/d/research/results/86508/
URI:	https://epub.wu.ac.at/id/eprint/6368

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