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The Cross-Sectional Implications of Rising Wage Inequality in the United States

52 Pages Posted: 12 Nov 2008  

Jonathan Heathcote

Minneapolis Fed

Kjetil Storeslettenand

affiliation not provided to SSRN

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

This paper explores the implications of the recent sharp rise in US wage inequality for welfare and the cross-sectional distributions of hours worked, consumption and earnings. From 1967 to 1996 cross-sectional dispersion of earnings increased more than wage dispersion, due to a rise in the correlation between wages and hours worked. Over the same period, inequality in hours worked remained roughly constant, and the dispersion in consumption and wealth increased only modestly. Using data from the PSID, we decompose the observed rise in wage inequality into changes in the variance of permanent, persistent and transitory shocks. With this changing wage process as the only primitive, we show that a calibrated overlapping-generations model with incomplete markets can account for these trends in cross-sectional US data. We also investigate the welfare costs of the rise in wage inequality: the ex-ante loss is equivalent to a five percent decline in lifetime income for the worst-affected cohorts.

Keywords: Consumption inequality, Labor supply, Wage inequality, Welfare

Suggested Citation

Heathcote, Jonathan and Storeslettenand, Kjetil and Violante, Giovanni L., The Cross-Sectional Implications of Rising Wage Inequality in the United States (January 2004). NYU Working Paper No. S-MF-04-01. Available at SSRN: https://ssrn.com/abstract=1300192

Jonathan Heathcote (Contact Author)

Minneapolis Fed ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

HOME PAGE: http://www.jonathanheathcote.com

Kjetil Storeslettenand

affiliation not provided to SSRN

No Address Available

Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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