The regional transmission of uncertainty shocks on income inequality in the United States

This paper explores the relationship between household income inequality and macroeconomic
uncertainty in the United States. Using a novel large-scale macroeconometric
model, we shed light on regional disparities of inequality responses to a national uncertainty
shock. The results suggest that income inequality decreases in most states, with a
pronounced degree of heterogeneity in terms of the dynamic responses. By contrast,
some few states, mostly located in the Midwest, display increasing levels of income
inequality over time. Forecast error variance and historical decompositions highlight
the importance of uncertainty shocks in explaining income inequality in most regions
considered. Finally, we explain differences in the responses of income inequality by means
of a simple regression analysis. These regressions reveal that the income composition as
well as labor market fundamentals determine the directional pattern of the dynamic responses.