Income Inequality and Job Creation

Abstract: We propose a novel channel through which rising income inequality affects job creation and macroeconomic outcomes. High-income households save relatively more in stocks and bonds but less in bank deposits. A rising top income share thereby increases the relative financing costs for bank-dependent firms, which in turn create fewer jobs. Exploiting variation across U.S. states and an IV strategy, we provide evidence for the channel. Calibrating a general equilibrium model to our cross-regional estimates, we show that rising inequality increases the employment share of large firms, reduces the labor share, and lowers output. The channel amplifies welfare effects of redistribution.

Keywords: income inequality; household heterogeneity; bank lending; job creation; business dynamism;

JEL Classification: D22; D31; E44; L25;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2022-06-01

Number: 1021

Note: Revised March 2023.