Who Bears the Cost of Aggregate Fluctuations and Why?

Recessions are typically associated with lower firm cashflows and higher discount rates. We show that these two components have very different implications for labor income growth.
Higher discount rates lead to lower worker earnings for workers at the bottom of the income distribution; these declines are primarily driven by job separations. By contrast, lower cashflow (Or productivity) news is followed by declines in earnings for workers at the top of the income distribution, with most of the effect coming from the intensive margin. We build an equilibrium model of labor market search that quantitatively replicates these facts. The model matches several stylized features of the data: the level of unemployment volatility with procyclical job finding rates and countercyclical job destruction rates; countercyclical tail risk in labor income growth; the low level of cyclicality of the average wage; the U-shaped sensitivity of worker earnings to aggregate output by prior income; and the cyclical evolution of income inequality.