Macroeconomic variables and income inequality in New Zealand: An exploration using conditional mixture distributions

This paper explores a method of examining the effects of macroeconomic variables on the personal distribution of income over time. The approach involves modelling the complete distribution of income in each year using a conditional mixture distribution. The parameters of the distribution are specified as functions of the macroeconomic variables. The paper shows how comparative static analysis, involving the Atkinson inequality measure, can be performed. The method is applied to male New Zealand income distribution data for wage and salary earners over the period 1985 to 1994. It appears that cyclical variations in unemployment and GDP contributed substantially to the observed increase in inequality over the period 1987 to 1991 and the reduction in inequality during the years 1993 and 1994.