Equilibrium unemployment-inequality correlation

Abstract

A vast empirical literature implies that increases in unemployment have an aggravating impact on income inequality, whence international and intertemporal inequality comparisons might be sometimes biased. We show how job-search models can be useful in better understanding this fact. In fact, in the classic Burdett and Mortensen (1998) model, as well as in one of its many possible extensions (Bontemps et al., 2000), search frictions are a force pushing the unemployment-inequality correlation in that direction: provided that the unemployment rate is no larger than 15%, a positive correlation between unemployment and inequality unequivocally emerges. (C) 2012 Elsevier Inc. All rights reserved.