Staff Reports
Income Inequality and Job Creation
Number 1021
June 2022 Revised August 2022

JEL classification: D22, D31, E44, L25

Authors: Donggyu Lee, Sebastian Doerr, and Thomas Drechsel

This paper shows that rising top income shares affect job creation at firms of different sizes. High-income households save relatively more in stocks and bonds, and less in bank deposits. We propose that a higher income share of top earners therefore channels funds to large firms, but tightens financing conditions for small, bank-dependent firms. In turn, small firms create relatively fewer jobs. Exploiting variation in top incomes across U.S. states and an instrumental variable strategy, we establish that an increase in the top 10 percent income share reduces the job creation rate of small firms, relative to large firms. Very small firms and those in bank-dependent industries are most affected. Experiments in a quantitative macroeconomic model show that growing top incomes account for 16 percent of the decline in the employment share of small firms since 1980, and that ignoring the link between inequality and job creation understates welfare effects of income redistribution.

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AUTHOR DISCLOSURE STATEMENT(S)
Donggyu Lee
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Sebastian Doerr
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Thomas Drechsel
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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