Impact of Uncertainty Shocks on Income and Wealth Inequality

Abstract We analyze the distributional consequences of uncertainty shocks in the U.S. economy. While their impact on income inequality appears marginal when measured by a single statistic, there are important variations: inequality between the rich and middle‐income groups decreases, while inequality between the middle and poor‐income groups increases significantly. Additionally, uncertainty shocks increase labor income inequality through higher unemployment rates but simultaneously decrease nonlabor income inequality by reducing business and interest income. Uncertainty shocks reduce disposable income inequality, demonstrating the role of redistribution policy. Finally, they tend to reduce wealth inequality, mainly due to their adverse impact on financial asset prices, predominantly owned by wealthy households.