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

We investigate the welfare consequences of the stark increase in wage and earnings inequality in the United States over the last 30 years. Our data stems from the Consumer Expenditure Survey, which is the only US dataset that contains information on wages, hours worked, earnings, and consumption for the same cross section of US households. First, we document that, while the cross-sectional variation in wages and disposable earnings has significantly increased, the overall dispersion in consumption has not changed significantly. 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. To assess the magnitude and the incidence of the welfare consequences of these trends, we estimate 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 1 to 6 percent of lifetime consumption for different groups.