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Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006

We conduct a systematic study of cross-sectional inequality in the United States over the period 1967-2006. Our empirical analysis integrates three widely-used micro data sources: the March Current Population Survey (CPS), the Panel Study of Income Dynamics (PSID), and the Consumer Expenditure Survey (CEX). We follow the mapping suggested by the household budget constraint from dispersion in individual wages to individual earnings, from individual to household earnings, and from household earnings to disposable income and ultimately consumption. Our main message is that both levels and trends in economic inequality depend crucially on the variable of analysis. Thus it is critical to understand how different dimensions of inequality are related via endogenous choices and institutions. Substantially, we find a continuous and sizable increase in wage inequality over the sample period. Changes in the distribution of hours sharpen the rise in inequality in the first half of the sample, but mitigate rising inequality in the post 1982 period. Taxes and transfers compress the level of inequality, especially at the bottom of the distribution, but have little overall effect on the trend. Finally, consumption data suggest that access to financial markets has reduced both the level and growth of economic inequality.

Authors: 
Jonathan Heathcote, Federal Reserve Bank of Minneapolis
Fabrizio Perri, University of Minnesota
Giovanni L. Violante, New York University
Publication Date: 
January, 2009
Publication Status: