The Macroeconomic Implications of Rising Wage Inequality in the United States

In recent decades, American workers have faced a rising college premium, a narrowing gender gap, and increasing wage volatility. This paper explores the quantitative and welfare implications of these changes. The framework is an incomplete-markets life cycle model in which individuals choose education, intrafamily time allocation, and savings. Given the observed history of the U.S. wage structure, the model replicates key trends in cross-sectional inequality in hours worked, earnings, and consumption. Recent cohorts enjoy welfare gains,on average, as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household. (c) 2010 by The University of Chicago. Allrights reserved..