Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266105 
Year of Publication: 
2022
Series/Report no.: 
Staff Report No. 1021
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
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.
Subjects: 
income inequality
job creation
small businesses
bank lending
household heterogeneity
financial frictions
JEL: 
D22
D31
E44
L25
Document Type: 
Working Paper

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