Inequality and the Speed of Recovery from the Great Recession: Evidence from 28 OECD Economies

Pre-crisis inequality did not predict how fast countries recovered from the 2008-09 recession. In a cross-section of 28 OECD countries, the clearest difference between fast and slow recoveries was institutional. Countries whose currency was locked to another took nearly three years longer to regain their pre-crisis output than countries that let theirs float (6.88 against 3.93 years, p = 0.024). I measure recovery speed in two ways, as the years taken to regain pre-crisis real GDP and as that duration divided by how far output fell. Both are regressed on the Gini coefficient, the top 10% wealth share, and a set of macroeconomic controls. Neither inequality measure is significant at the 5% level on the full sample when entered alone, and neither is robustly significant with controls. Four explanations for that null are considered. One is that the net Gini used here, taken after taxes and transfers, is partly a product of the spending variables sitting beside it. Another is that the debt controls may absorb the channel inequality would work through. A third is that inequality moves with the size of the welfare state, which is the better measured of the two and so tends to take the credit, and a fourth is that one crisis is too short a window for a force that moves over decades. Most of the null likely comes from the last two. The regime gap is not explained by the locked group having fallen further, and adding the regime variable to the full model nearly triples adjusted R-squared while inequality stays indistinguishable from zero. My conjecture is that a country which cannot set its own interest rate inherits one calibrated for somebody else's recovery, with the 2011 rate rise by the European Central Bank (ECB) as the obvious candidate: Germany was back at its pre-crisis output level by then; Italy, Spain, and Portugal were not. Read that with caution. The variable does not separate it from the simple inability to devalue, from the sovereign debt crisis, or from common fiscal rules. AI disclosure: During the preparation of this work, the author used Claude (Anthropic) in order to check the data against their original sources, draw Figure 1, and revise the wording and structure of the text. After using this tool, the output was reviewed, edited, and verified by the author, who takes full responsibility for the content.