Macroeconomic Change and the Distribution of Income—Frameworks and Tools

The opening paragraphs of this chapter raised the question of what one would expect the distributional impact of the GR to be, and contrasted expectations of large changes (by reference to the Great Depression) with the possibility of their amelioration by contemporary institutions and policy instruments. That brief discussion suggested that the distributional impact of a major recession is not straightforwardly predictable. There is also the complication that distributional impacts may vary depending on which dimension one considers, whether average living standards, poverty, or inequality. The source of many ambiguities in predictions is our interest in a measure of economic well-being that combines multiple income sources and multiple income recipients (going from individual receipt to a household total).

In this section, we review the distributional impacts of recessions that are suggested by existing analytical frameworks. (We do not consider the longterm relationship between economic growth and the income distribution about which see e.g. the pioneering analysis by Kuznets 1955.) The review underscores the point that clear cut conclusions about the GR's likely impact rarely drop out and, hence, empirical analysis of the kind offered in the rest of the book is required. A second purpose of this section is to motivate and justify the approaches that are employed in the later chapters. The discussion that follows highlights a number of key elements and it is these that are tracked in the subsequent empirical analysis.

First we consider the insights offered by formal economic models and second we discuss two descriptive frameworks based on decompositions— breakdowns by type of person ('population subgroup') and by type of income received ('income source'). Finally we consider the potential of tax-benefit microsimulation models.

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