Income Distribution and Economic Crises

This paper analyzes the relationship between income distribution and the severity of economic crises, where the severity is measured by the length and the depth of the recessions. Using an extensive panel dataset on income distribution and employing an event study framework, we find significant evidence that there is a negative association between the prevailing degree of income inequality and the severity of the recessions. In the case of high income countries that have bad income distribution, however, recessions are observed to be longer than the average. This is likely to result from the strong status-quo bias of the powerful groups and their access to the means of redistribution towards the poor in order to circumvent the reforms pressures for creative destruction and improved income distribution. The longer period of recessions observed in developed countries than in less developed countries in the aftermath of the Great Recession is supportive of this argument.The findings also reveal that recessions tend to be longer during the decade of the 1990s than the rest of the period studied. Evidence indicates that openness is also associated with prolonged recessions.With regard to the impact of recessions on income distribution, the evidence in the paper indicates that the post-crises income distribution worsens significantly with the length but improves with the depth of the preceding recessions. We also note that, in addition to the persistence effect, the lack of monetary discipline worsens income distribution in the post-crises periods significantly