Relative Wage Movements and the Distribution of Consumption
University College London - Department of Economics; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Steven J. Davis
University of Chicago; National Bureau of Economic Research (NBER)
JOURNAL OF POLITICAL ECONOMY, Vol. 104, No. 6, December 1996
We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.
JEL Classification: E21Accepted Paper Series
Date posted: November 4, 1996
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