Impact of Uncertainty Shocks on Income and Wealth Inequality

Abstract

We analyze the distributional consequences of uncertainty shocks in the U.S. economy at a business cycle frequency. Our findings reveal that uncertainty shocks have heterogeneous effects across income and wealth distribution. While their impact on income inequality appears marginal when measured by a single statistic, there are important variations: inequality between the rich and middle-income groups decreases, while inequality between the middle and poor-income groups increases significantly. Additionally, uncertainty shocks increase labor income inequality through higher unemployment rates, but simultaneously reduce non-labor income inequality by causing a decline in business and interest income. Moreover, uncertainty shocks lead to a decrease in disposable income inequality, demonstrating the role of redistribution policy. Finally, they tend to reduce wealth inequality, mainly due to their adverse impact on financial asset prices, predominantly owned by wealthy households. Show more