Abstract

This is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution, controlling for the influence of inflation. Increases in structural unemployment have a substantial aggravating impact on income inequality. Inflation has a progressive impact, which is due to the unexpected component. The study demonstrates that previous work failed to take into account the stochastic trend behavior of the variables. Consequently, specifications used by previous research cannot predict the behavior of income shares after 1983, whereas the specification used by this paper generates accurate forecasts. The results also indicate that a sustained GNP growth is not necessarily associated with an improvement in income inequality, because sustained GNP growth can coexist with increased structural unemployment.

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