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Observed and Unobserved Sources of Wealth Inequality

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Abstract

This paper studies the implications of observed and unobserved heterogeneity in wages across households with different education levels on wealth inequality and life-cycle savings. Using the PSID, I estimate skill-specific wage processes that allow both observed between-group wage dispersion and unobserved within-group wage dispersion. The implications of these estimated skill-specific wage processes are quantitatively studied in an incomplete-markets overlapping-generations general equilibrium model wherein households choose their education. I show that, in contrast to a model with a common wage process, the model with skill-specific wage processes explains far more wealth inequality and life-cycle wealth accumulation of skilled and unskilled households seen in data.

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  • Heejeong Kim, 2019. "Observed and Unobserved Sources of Wealth Inequality," Working Papers 19003, Concordia University, Department of Economics.
    • Handle: RePEc:crd:wpaper:19003
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    Keywords

    Incomplete markets; wealth inequality; life-cycle savings;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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