The Increase in Income Cyclicality of High-Income Households and Its Relation to the Rise

Abstract: We document that there has been a large increase in the cyclicality of the incomes of high-income households that coincides with the rise in their share of total income. In the U.S., since the early 1980s, the incomes of those in the top 1 % of the income distribution, which are on average 11 times the average income, have been 2.4 times as cyclical as average income resulting in the top 1 % bearing 28 % of aggregate income fluctuations. Prior to the early 1980s, the income of the top 1 % was slightly less cyclical than that of the average household. The change in top 1 % income cyclicality is to a large extent due to an increase in the share and cyclicality of wages and salaries. This high cyclicality among top incomes is also found i) for households without stock options, ii) for changes in income for the same set of households over time, iii) for post-tax, post-transfer income, and iv) for consumption in the available data. We contrast the cyclicality of the top 1 % with the cyclicalities of groups further down the income distribution, and reconcile our findings with the earlier literature. We document a link between the increased income share and increased income cyclicality of the top 1%, finding that the cyclicality of the top 1 % increases decade by decade as the top 1 % income share increases, and across countries increases in income cyclicality of the top 1 % are highly correlated with increases in top 1 % income shares. This close relationship suggests a common cause, which we conjecture is technological change that increase the optimal production scale of the most talented. * For helpful comments, we thank the editors Justin Wolfers, David Romer, our discussants Rebecca Blank and Eri