Time-Varying Predictability of Labor Productivity on Inequality in United Kingdom

In this paper, we analyze time-varying predictability of labor productivity for growth in income (and consumption) inequality of the United Kingdom (UK) based on a high-frequency (quarterly) data set over 1975:Q1 to 2016:Q1. Results indicate that the growth rate of an index of labor productivity has a strong predictive power on growth rate of income (and consumption) inequality in the UK. Interestingly, the strength of the predictive power is found to be higher towards the end of the sample period in the wake of the global financial crisis. In addition, based on time-varying impulse response function analysis, we find that inequality and labor productivity growth rates are in general negatively associated over our sample period, barring a short-lived positive impact initially.