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On the Welfare Consequences of the Increase in Inequality in the United States

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Author Info
Dirk Krueger
Fabrizio Perri

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Abstract

We investigate the welfare consequences of the stark increase in wage and earnings inequality in the US over the last 30 years. Our data stems from the Consumer Expenditure Survey, which is the only US data set that contains information on wages, hours worked, earnings and consumption for the same cross section of US households. We first document that, while the cross-sectional variation in wages and disposable earnings has significantly increased, the overall dispersion in consumption has not significantly changed. We also show that households at the bottom of the consumption distribution have increased their working hours to a larger extent than the rest of the population. In order to assess the magnitude and the incidence of the welfare consquences of these trends we stimate stochastic processes for earnings, consumption and leisure that are consistent with observed cross-sectional variability (both within and between education groups) and with household mobility patterns. In a standard lifetime utility framework, using consumption and leisure processes, as opposed to earnings processes, results in fairly robust estimates of these consequences. We find that about 60 percent of US households face welfare losses and that the size of these losses ranges from one to six percent of lifetime consumption for different groups.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9993.

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Date of creation: Sep 2003
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Handle: RePEc:nbr:nberwo:9993

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Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  6. Chinhui Juhn & Kevin Murphy & Robert Topel, 2002. "Current Unemployment, Historically Contemplated," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2002-1), pages 79-136. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "The Cross-Sectional Implications of Rising Wage Inequality in the United States," CEPR Discussion Papers 4296, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Tullio Jappelli & Luigi Pistaferri, 2005. "Intertemporal Choice and Consumption Mobility," CFS Working Paper Series 2005/28, Center for Financial Studies. [Downloadable!]
    Other versions:
  4. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. David McKenzie & Ernesto Schargrodsky, 2005. "Buying Less, But Shopping More: Changes In Consumption Patterns During A Crisis," Business School Working Papers buyinglessshop, Universidad Torcuato Di Tella. [Downloadable!]
  6. Dirk Krueger & Fabrizio Perri, 2005. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," CFS Working Paper Series 2005/15, Center for Financial Studies. [Downloadable!]
    Other versions:
  7. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2005. "Insurance and Opportunities: The Welfare Implications of Rising Wage Dispersion," CEPR Discussion Papers 5200, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2007. "Insurance and Opportunities: A Welfare Analysis of Labor Market Risk," NBER Working Papers 13673, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Matteo Iacoviello, 2005. "Household Debt and Income Inequality, 1963-2003," Boston College Working Papers in Economics 629, Boston College Department of Economics, revised 18 Oct 2007. [Downloadable!]
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  10. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Telyukova, Irina A., 2009. "Household Need for Liquidity and the Credit Card Debt Puzzle," MPRA Paper 6674, University Library of Munich, Germany. [Downloadable!]
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  12. Mika Kuismanen & Luigi Pistaferri, 2006. "Information, habits, and consumption behavior - evidence from micro data," Working Paper Series 572, European Central Bank. [Downloadable!]
  13. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2007. "Consumption and Labour Supply with Partial Insurance: An Analytical Framework," CEPR Discussion Papers 6280, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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