Bárbara Sádaba, Universidad Diego Portales

Paper: On the cyclicality of wage inequality in the US

Abstract: Existing studies generally find that hourly wage inequality is acyclical over the business cycle. We show that this finding masks substantial variation over time. Using quarterly U.S. data from 1979 to 2023, we estimate wage-inequality and GDP cycles using Bayesian unobserved-components models and construct time-varying measures of their co-movement. Wage inequality alternates between procyclical and countercyclical episodes during the 1980s and early 1990s, but becomes predominantly countercyclical after the mid-1990s. The conventional near-zero full-sample correlation therefore reflects changes in the direction of cyclical co-movement rather than an absence of cyclical fluctuations. The shift toward countercyclicality is particularly pronounced for broad measures of wage dispersion and is robust to alternative inequality measures, filtering procedures, and joint estimation of GDP and inequality. We further document correlations between the evolution of cyclical inequality and changes in workforce composition and other labor-market factors.