On the Effects of Inflation and Unemployment on Income Distribution in Urban China and the Russian Federation: A Comparative Study

Earlier research regarding the relationship between income distribution and macroeconomic conditions such as inflation and unemployment rates in the United States suggests that an increase in inflation reduces the income inequality, and an increase in unemployment rate worsens the situation. During the last two decades of 20th century, the Russian Federation and the People’s Republic China had endured a process of profound political, social and economic transformation. Both countries changed their previous centrally planned economies and introduced market-oriented reforms. Within the first decade of the 21st century, many economists investigated the evolution of the income distributions of these two countries. However, among these researchers, few discussed the impact of macroeconomic conditions on income distribution. Our study analyzes the interactions between income distribution and macroeconomic conditions including inflation and unemployment rates in the Russian Federation and urban China. Unlike other studies either applied OLS to the level time series data or to the first difference of these time series, our study is the first in the literature to employ the Structural Vector Autoregressive (SVAR) approach to take into account possible contemporaneous relationship among income distribution, inflation rate and unemployment rate. Our empirical results suggest that for the Russian Federation and urban China, inflation has no impact on the income shares. However, the impact of rising unemployment rate on income inequalities turns out to be different in the Russian Federation and urban China: an increase in unemployment will worsen the income inequality in urban China but help to reduce the income inequality in the Russian Federation.