Cyclical Patterns of Employment, Wage Inequality, and the Functional Distribution of Income

Like the functional distribution of income, wage inequality is subject to fairly regular cyclical fluctuations. In this paper, we (ⅰ) analyze sources of these fluctuations, (ⅱ) present models of endogenous cycles that include heterogeneous labor and wage inequality, (ⅲ) show that these models generate patterns of both wage inequality and the functional income distribution that are in line with the evidence, and (ⅳ) caution against any extrapolation of cyclical patterns to long-term trends and beliefs in expansionary aggregate demand policy as the key instrument to promote greater economic equality.