Inequality and Business Cycles in the U.S. and European Union Countries SOPHIA DIMELIS AND ALEXANDRA LIVADA* This paper derives the business cycle properties of some aggregate and disaggregate inequality indices for the U.S. and three European Union countries (United Kingdom, Italy, and Greece). The findings suggest that inequality indices move countercyclically with output in the U.S. and the United Kingdom, a procyclical behavior prevailed in Greece, and a mixed cycle influenced Italy. A common countercyctical pattern of inequality indices with inflation and unemployment characterizes the three large economies (U.S., United Kingdom, and Italy). Also, in most countries, the top income group seems to lose at the benefit of the rest during inflationary periods while, in all four countries, the poor will gain from inflation and suffer from unemployment. (JEL E32, D63, 057) Introduction A challenging topic in income inequality research has always been the analysis of how aggregate and disaggregate inequality indices fluctuate and how they are influenced by macrovariables. The majority of studies in relevant literature use traditional econometric techniques to examine the distributive impact of the most important macroeconomic aggregates such as inflation, unemployment, and growth. These studies suggest that unemployment increases inequality while growth and inflation ambiguously affect income distribution. Some studies for the U.S. are Schultz [1969], Mirer [1973a, 1973b], Beach [1977], Blinder and Esaki [1978], and Blank and Blinder [1986]. Studies for other countries include, among others, Schultz [1969] for the Netherlands, Buse [1982] for Canada, Nolan [1989] for the United Kingdom, Bjorklund [1991] for Sweden, and Achdut [1996] for Israel. However, the cyclical influences in these studies were either ignored or captured ad hoc by a trend factor among the regressors. Income inequality has also been viewed extensively in literature in connection with development economics. The question of whether or not a trade-off exists between inequality and growth remains controversial. This literature can be traced back to Kuznets' [1955] inverted U-curve hypothesis which postulates that, as economic development occurs, income inequality widens in the early phase and narrows at later stages of development. This hypothesis has been investigated both theoretically and empirically in various studies [Chenery et al., 1974; Danziger and Gottschalk, 1982; *Athens University--Greece.The authors appreciate the helpfulcomments from the participantsof the International Atlantic EconomicConference,Rome,Italy,March14-21, 1998 and fromthe participants of the 1997meetings of the Society for EconomicDynamics,Oxford, United Kingdom,July 1997. 321