Inequality and the Lifecycle

53 Pages Posted: 4 Jun 2011

See all articles by Greg Kaplan

Greg Kaplan

University of Pennsylvania

Date Written: May 28, 2011


I structurally estimate an incomplete markets lifecycle model with endogenous labor supply, using data on the joint distribution of wages, hours and consumption. The model is successful at matching the evolution of both the first and second moments of the data over the lifecycle. The key challenge for the model is to generate declining inequality in annual hours worked over the first half of the working life, while respecting the constraints imposed by the data on consumption and wages. I argue that this is a robust feature of the data on lifecycle labor supply that is strongly at odds with the intra-temporal first order condition for labor supply. Allowing for a realistic degree of involuntary unemployment, coupled with preferences that feature non-separability in the disutility of the extensive and intensive margins of hours worked, allows the model to overcome this challenge. The results imply that labor market frictions are important in jointly accounting for observed cross-sectional inequality in labor supply and consumption and may have quantitative relevance for analyses that exploit the intra-temporal first-order condition for labor.

Keywords: Structural Estimation, Inequality, Lifecycle, Labor Supply, Incomplete Markets, Consumption, Unemployment

JEL Classification: D10, D31, E21, J22

Suggested Citation

Kaplan, Greg, Inequality and the Lifecycle (May 28, 2011). PIER Working Paper No. 11-014. Available at SSRN: or

Greg Kaplan (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

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