SOEP Brown Bag Seminar

Current developments in the labor income distribution shape the business cycle and the transmission of fiscal and monetary policy measures. During economic crises, timely and well targeted economic policy becomes essential but the volatility of the (labor) income distribution is particularly high. Detailed distributional data on household incomes becomes available after one year at the earliest. This paper proposes to nowcast the full labor income distribution by exploiting the fact that aggregate macroeconomic indicators and sectoral labor market data are informative for its higher moments. We nowcast brackets of the annual labor income distribution of German households from the Socio-Economic Panel with higher-frequency macroeconomic data in a state-of-the-art nowcasting model. Using a nonparametric generalized Pareto distribution, we construct nowcasts of a continuous labor income distribution. We find that high-frequency macroeconomic and sectoral labor market indicators have predictive power not only for the mean and median labor income but also for movements in the tails of the distribution. The analysis suggests that inequality in Germany has increased slightly since the height of the COVID-19 pandemic.