Staff Working Paper No. 1,083
By Tomas Key and Jamie Lenney
In this paper, we examine the response of earnings and employment to fluctuations in aggregate economic activity (GDP) across the income distribution. Using data from the UK’s Labour Force Survey, we present evidence that aggregate fluctuations have economically significant but heterogeneous impacts across the income distribution. While the earnings response is broadly similar across the distribution, further decompositions reveal important differences in the channels of transmission. Changes to hours worked and employment better explain the earnings response in the bottom half of the distribution, whereas changes to the hourly wage are more important in the top half. We integrate our empirical results into a HANK model and use it to highlight the importance of these margins of adjustment in determining a broad precautionary savings response of households to a monetary policy shock. We show that this channel is economically significant across the income distribution.
This version was updated in June 2025.
The impact of aggregate fluctuations across the UK income distribution
