Disaggregating the Effects of Economic Growth on the Distribution of Income

This paper disaggregates total income received by households into a set of components and studies the comparative changes in these components in response to economic growth. The relative responsiveness of wages, hours of work, total labor market income of household heads and wives, and transfer income is assessed across groups designated by income, race, sex, and age. The results provide a picture of the channels by which economic growth produces income change. Significant differences in elasticities (responsiveness to economic growth) are found to exist both across income components and across population groups for the same components. The income distribution narrows in times of growth, primarily because of large elasticities of la~or market income among poor heads of household for whom both wages and hours increase during economic upturns. The labor market earnings of women, both as wives and as household heads, are far less responsive to growth. The change in transfer income in response to growth varies enormously between population groups and by type of transfer. DISAGGREGATING THE EFFECTS OF ECONOMIC GROWTH ON THE DISTRIBUTION OF INCOME A great deal of political discussion in recent years has focused on the extent to which economic growth helps relatively disadvantaged groups in the United States. While some claim that the best thing we can do for the poor is to make the economy grow, others contend that economic growth passes by many low-income groups and simply leaves them worse off, relative to the rest of the society. Previous research concerning the effect of the macro economy on the income distribution has shown that both claims have some validity.l At an aggregate level, economic growth appears to have some narrowing effect on the income distribution, reducing inequality. But there are specific demographic groups that seem less responsive to a rise in gross national product, in particular, elderly and female-headed households. 2 On the other hand, some groups seem to respond strongly to economic growth, in particular, young and black male-headed households. Unfortunately, these studies have investigated the cyclicality of income change using only very aggregate income measures. No attempt is made to investigate which components of income respond most strongly to the economy and which are least affected. In contrast, two alternative research approaches have focused on more disaggregate cyclical effects. One group of studies has identified components of the cycle and looked at the effects of unemployment and/or inflation on the aggregate resources of various population groups.3 A second group of studies has explored the cyclicality of specific income components, such as male wage rates or wives' labor force particiation. 4