This thesis is concerned with two main questions. Do systemic banking crises substantially affect the income distribution in a country? Is income inequality a destabilising factor for the macro-economy? In order to answer the first question, this thesis examines a panel of 26 countries since 1900 and assembles a new database of crises, finding that the impact of major banking crises on the national income shares detained by the income groups within the richest decile is mostly small in magnitude. Indeed, the estimated impact is never bigger than a standard deviation of the specific top shares under investigation. Results are also confirmed in a separate analysis for the United States and are robust to a series of checks. These findings lend indirect support to the structuralist hypothesis that only substantial changes in government policies and institutional frameworks can bring about radical changes in income distribution. The analysis also highlights interesting heterogeneity across different income groups, country groups and time periods. The second question is addressed by making use of a newly assembled database on different dimensions of economic inequality. The new data helps to reject the statistical validity of the hypotheses that either growing inequality or a high level of inequality may systematically precede the onset of major banking crises. In addition, simulations based on the UK Family Expenditure Survey data find that even a full equalisation of income would increase the aggregate consumption by 3 percentage points at most. These findings, taken together, point out that an increase in income inequality may not concur to reduce the pressure on aggregate demand or be adduced as a structural factor of financial instability. Nonetheless, the evidence is not yet clear cut as the work further documents that periods of increasing income inequality in the UK were also associated with a reduction of the saving rates across the whole income distribution since 1968. The analysis contends that such evidence of under-saving behaviour may be consistent with the relative income hypothesis and some of its recent formulations such as the ’expenditure cascades’ theory.

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This thesis consists of four separate chapters which address different aspects of inequality and income determination. The first three chapters are country-level studies which examine (1) how incomes are shaped by spatial price differences, (2) the factor income composition, and (3) enterprise size. The final chapter analyses how income inequality changed at the global level. The first chapter investigates the implications of regional price differences for earnings differentials and inequality in Germany. I combine a district-level price index with administrative earnings data from social security records. Prices have a strong equalising effect on district average wages in West Germany, but a weaker effect in East Germany and at the national level. The change in overall inequality as a result of regional price differences is small (although significant in many cases), because inequality is mostly explained by differences within rather than between districts. The second chapter is motivated by the rapid increase in top income shares in the United States since the 1980s. Using data derived from tax filings, I show that this pattern is very similar after controlling for changes in tax unit size. Over the same period as top income shares increased, the composition of these incomes changed dramatically, with the labour share rising. Using a non-parametric copula framework, I show that incomes from labour and capital have become more closely associated at the top. This association is asymmetric such that top wage earners are more likely to also receive high capital incomes, compared with top capital income recipients receiving high wages. In the third chapter, I investigate the positive cross-sectional relationship between enterprise size and earnings using panel data from Ghana. I find evidence for a significant firm size effect in matched firm-worker data and a labour force panel, even after controlling for individual fixed effects. The size effect in self-employment is stronger in the cross-section, but it is driven by individual time-invariant characteristics. The final chapter studies the global interpersonal income distribution using a newly constructed and improved database of national household surveys between 1988 and 2008. The chapter finds that the global Gini remains high and approximately unchanged at around 0.7. However, this hides a substantial change in the global distribution from a twin-peaked distribution in 1988 into a single-peaked one now. Furthermore, the regional composition of the global distribution changed, as China graduated from the bottom ranks. As a result of the growth in Asia, the poorest quantiles of the global distribution are now largely from Sub-Saharan Africa. By exploiting the panel dimension of the dataset, the analysis shows which decile-groups within countries have benefitted most over this 20-year period. In addition, the chapter presents a preliminary assessment of how estimates of global inequality are affected by the likely underreporting of top incomes in surveys.