Politico-Economic Consequences of Rising Wage Inequality
This paper uses a dynamic political economy model to evaluate whether the observed rise in wage inequality can explain an increase in transfers and effective tax rates in the U.S. over the past two decades. Specifically, we assume that households have uninsurable idiosyncratic labor efficiency shocks along Aiyagari (1994) and consider policy choices by a median voter which are required to be consistent with a sequential equilibrium. We deal with the problem that policy outcomes affect the evolution of the wealth distribution by approximating the distribution by a small set of moments as in Krusell and Smith (1998). We calibrate the model to match properties of the U.S. earnings distribution in 1983 and then evaluate the response of the social insurance policies to the observed rise in wage inequality over the next decade and a half. This increase in wage dispersion is capable of explaining over two-thirds of the increase in effective taxes observed in the data while a utilitarian approach would explain only one-third of the change.
|Date of creation:||2007|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
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.:
- Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
- Edward N. Wolff, 2004. "Changes in Household Wealth in the 1980s and 1990s in the U.S," Economics Working Paper Archive wp_407, Levy Economics Institute.
- MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-1085, December.
- Aiyagari, S Rao, 1995.
"Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting,"
Journal of Political Economy,
University of Chicago Press, vol. 103(6), pages 1158-1175, December.
- S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
- Per Krusell & Anthony A. Smith & Jr., 1998.
"Income and Wealth Heterogeneity in the Macroeconomy,"
Journal of Political Economy,
University of Chicago Press, vol. 106(5), pages 867-896, October.
- Per Krusell & Anthony A. Smith, Jr., "undated". "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
- Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
- 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.
- Jonathan Heathcote & Kjetil Storesletten, 2005. "Insurance and Opportunities: The Welfare Implications of Rising Wage Dispersion," 2005 Meeting Papers 107, Society for Economic Dynamics.
- Heathcote, Jonathan, 1999.
"Fiscal Policy with Heterogeneous Agents and Incomplete Markets,"
SSE/EFI Working Paper Series in Economics and Finance
319, Stockholm School of Economics, revised 28 Jul 1999.
- Jonathan Heathcote, 2005. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 161-188.
- Jonathan Heathcote, 2003. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers gueconwpa~03-03-23, Georgetown University, Department of Economics.
- Heathcote, Jonathan, 2001. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers 01-03, Duke University, Department of Economics.
- Jose-Victor Rios-Rull & Per Krusell, 1999.
"On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model,"
American Economic Review,
American Economic Association, vol. 89(5), pages 1156-1181, December.
- Per Krusell & Jose-Victor Rios-Rull, 1997. "On the size of U.S. government: political economy in the neoclassical growth model," Staff Report 234, Federal Reserve Bank of Minneapolis.
- S. Rao Aiyagari & Dan Peled, 1995.
"Social insurance and taxation under sequential majority voting and utilitarian regimes,"
197, Federal Reserve Bank of Minneapolis.
- Rao Aiyagari, S. & Peled, Dan, 1995. "Social insurance and taxation under sequential majority voting and utilitarian regimes," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1511-1528, November.
- David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, 05.
- Marina Azzimonti & Eva de Francisco & Per Krusell, 2006.
"The political economy of labor subsidies,"
2006 Meeting Papers
588, Society for Economic Dynamics.
- S. Rao Aiyagari, 1994.
"Uninsured Idiosyncratic Risk and Aggregate Saving,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 109(3), pages 659-684.
- Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
When requesting a correction, please mention this item's handle: RePEc:red:sed007:129. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.