Economic University in Cracow organizes annual Workshop on Macroeconomic Research. Though the interests of the organizers lie mostly in time series econometrics and their uses for macro, they welcomed our presentation on the drivers of wealth inequality. We are particularly grateful for comments of Jan Acedanski. Marek A Dabrowski and Joao Sousa.

In this paper, we study the evolution of income and wealth inequality in an economy undergoing structural change. In an economy with frictions, structural change implies a rise in income inequality, at least transitory, with the following rationale: as an economy enters structural change, wages become more dispersed because some workers are still employed in the declining sector, whereas the rest of the labor force is already working in the emerging ones. This polarization is transitory in a sense that when the structural change is over, the wages eventually become less dispersed. Economic intuition hints that without economic frictions, structural change should have no effects on inequality, because wages are always fully equalized. Economic intuition is more ambiguous for the effects on wealth inequality. On the one hand, increased dispersion in incomes implies increased dispersion in the ability to accumulate wealth across individuals. On the other hand, workers experience greater uncertainty which may push them to more precautionary savings, which works towards equalizing wealth distribution. The net effect of these two opposing forces is essentially an empirical question. In addition, it remains unclear is whether episodes of structural change have lasting effects on wealth distribution. Finally, it remains unclear if and to what extent redistribution policies can effectively mitigate the rise in income and wealth inequality. We seek to address these questions in a general equilibrium model.