This paper analyzes the role of income distribution in macroeconomic analysis. It demonstrates that long-run equilibrium depends on the initial distribution of income. Empirical evidence suggests that economies with more equal income distribution tend to be wealthier in the long run. The study provides an additional explanation for persistent differences in per-capita output across countries and sheds light on cross-country differences in macroeconomic adjustment to aggregate shocks. The paper develops a dynamic general equilibrium model with overlapping generations and intergenerational altruism. The economy consists of one good that can be produced by either a skill-intensive or unskilled-intensive process. The aggregate endowment of labor is exogenously given, while the decomposition of the labor force between skilled and unskilled labor is endogenously determined. Individuals live two periods, and their decisions on education and labor depend on their inheritance of capital. The paper shows that capital market imperfections, such as enforcement costs, lead to higher interest rates for borrowers than for lenders. This limits the acquisition of skills to those who inherit a sufficiently high level of wealth. Thus, the distribution of wealth determines the aggregate level of skilled and unskilled labor and consequently the aggregate level of output. The economy is characterized by multiple steady-state equilibria due to non-convexities in the production of human capital. Wealth distribution, therefore, carries long-run as well as short-run implications. The historical distribution of wealth determines the dynamic evolution of the economy, the long-run decomposition of the labor force between skilled and unskilled labor, and consequently the long-run output. The paper shows that the distribution of wealth has significant effects on macroeconomic variables such as investment, output, and growth. It also demonstrates that wealth distribution is significant in the determination of macroeconomic adjustment to aggregate supply shocks, demand shocks, and technological innovations. The structural component of the adjustment process, i.e., the shift of labor from the unskilled to the skilled sector, is larger the more equal income is distributed. The paper also extends the basic model to incorporate variable wages for unskilled workers and examines the relationship between wealth distribution and national income. It shows that economies with more equal income distribution adjust better to macroeconomic shocks, with smaller income losses, than economies with highly unequal distribution of income. The results conform with empirical findings that income is more equally distributed in developed than in less-developed countries.This paper analyzes the role of income distribution in macroeconomic analysis. It demonstrates that long-run equilibrium depends on the initial distribution of income. Empirical evidence suggests that economies with more equal income distribution tend to be wealthier in the long run. The study provides an additional explanation for persistent differences in per-capita output across countries and sheds light on cross-country differences in macroeconomic adjustment to aggregate shocks. The paper develops a dynamic general equilibrium model with overlapping generations and intergenerational altruism. The economy consists of one good that can be produced by either a skill-intensive or unskilled-intensive process. The aggregate endowment of labor is exogenously given, while the decomposition of the labor force between skilled and unskilled labor is endogenously determined. Individuals live two periods, and their decisions on education and labor depend on their inheritance of capital. The paper shows that capital market imperfections, such as enforcement costs, lead to higher interest rates for borrowers than for lenders. This limits the acquisition of skills to those who inherit a sufficiently high level of wealth. Thus, the distribution of wealth determines the aggregate level of skilled and unskilled labor and consequently the aggregate level of output. The economy is characterized by multiple steady-state equilibria due to non-convexities in the production of human capital. Wealth distribution, therefore, carries long-run as well as short-run implications. The historical distribution of wealth determines the dynamic evolution of the economy, the long-run decomposition of the labor force between skilled and unskilled labor, and consequently the long-run output. The paper shows that the distribution of wealth has significant effects on macroeconomic variables such as investment, output, and growth. It also demonstrates that wealth distribution is significant in the determination of macroeconomic adjustment to aggregate supply shocks, demand shocks, and technological innovations. The structural component of the adjustment process, i.e., the shift of labor from the unskilled to the skilled sector, is larger the more equal income is distributed. The paper also extends the basic model to incorporate variable wages for unskilled workers and examines the relationship between wealth distribution and national income. It shows that economies with more equal income distribution adjust better to macroeconomic shocks, with smaller income losses, than economies with highly unequal distribution of income. The results conform with empirical findings that income is more equally distributed in developed than in less-developed countries.