The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares

51 Pages Posted: 6 Dec 2010 Last revised: 19 Apr 2023

See all articles by Jonathan A. Parker

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Annette Vissing-Jorgensen

Federal Reserve Board; National Bureau of Economic Research (NBER)

Date Written: December 2010

Abstract

We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality.

Suggested Citation

Parker, Jonathan A. and Vissing-Jorgensen, Annette, The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares (December 2010). NBER Working Paper No. w16577, Available at SSRN: https://ssrn.com/abstract=1719937

Jonathan A. Parker (Contact Author)

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Annette Vissing-Jorgensen

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