DP13540 Permanent-Income Inequality

Author(s): Brant Abbott, Giovanni Gallipoli
Publication Date: February 2019
Date Revised: March 2019
Keyword(s): Consumption, Human Capital, inequality, permanent income, Wealth
JEL(s): D31, D6, E2, E21, I24, J17, J24
Programme Areas: Labour Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13540

We characterize the distribution of permanent-income and quantify the value of assets and human capital in lifetime wealth portfolios. We estimate the distribution of human wealth using nonparametric identification results that allow for state-dependent stochastic discounting and unobserved heterogeneity. The approach imposes no restrictions on income processes or utility. Accounting for the value of human capital delivers a different view of inequality: (i) in 2016 the top 10% share of permanent-income was 1/3 lower than the corresponding share of assets; (ii) however, since 1989, the top 10% share of permanent-income has grown much faster than the corresponding share of assets. Human wealth has a mitigating influence on inequality, but this effect has waned over time due to the growing importance of assets in lifetime wealth portfolios. We find that consumption expenditures are tightly linked to permanent-income; however, liquidity constraints can lead to substantial deviations below permanent-income.