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Inequality and the Lifecycle

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  • Greg Kaplan

    ()
    (Department of Economics, University of Pennsylvania)

Abstract

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 nonseparability 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.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-014.

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Length: 53 pages
Date of creation: 28 May 2011
Date of revision:
Handle: RePEc:pen:papers:11-014

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

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References

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  1. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-67, June.
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  3. Attanasio, O. & Low, H. & Sanchez-Marcos, V., 2004. "Explaining Changes in Female Labour Supply in a Life-cycle Model," Cambridge Working Papers in Economics 0451, Faculty of Economics, University of Cambridge.
  4. Christopher Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," Economics Working Paper Archive 520, The Johns Hopkins University,Department of Economics.
  5. 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.
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  8. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2005. "Two Views of Inequality Over the Life Cycle," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 765-775, 04/05.
  9. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
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  12. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
  13. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-57, September.
  14. 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.
  15. Orazio P. Attanasio & Nicola Pavoni, 2011. "Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption," Econometrica, Econometric Society, vol. 79(4), pages 1027-1068, 07.
  16. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  17. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  18. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
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