Macroeconomic variables and income distribution

Abstract

This paper presents 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 flexible functional form from the generalised exponential family of distributions. The parameters of the distribution are specified as functions of the macroeconomic variables. It is shown how comparative static analyses, involving the modes and Atkinson inequality measures, can be performed. The method is applied to male New Zealand income distribution data for the period 1985–1994. The rate of unemployment is found to be the primary influence on the form of the distribution. Higher unemployment is found to decrease the modal income and increase the Atkinson inequality measure.