Permanent-Income Inequality

We propose a non-parametric approach to estimate the distribution of Permanent-Income inequality. Using microdata for 1989-2016, we show that households at the top of the assets distribution have not increased their share of human wealth. Instead, the higher concentration of permanent income over the past decades is due to the growing importance of assets, as opposed to human capital, in lifetime wealth portfolios.
We show that permanent income is tightly linked to consumption expenditures. We estimate an average propensity to consume out of permanent income of roughly 0.8; this propensity to consume varies significantly in the cross-section of US households, changing with both value and composition of each household’s lifetime wealth portfolio.

With
Brant Abbott

Abstract
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.
DRAFT (PDF)

Citation

@techreport{abbott-gallipoli-2019PI,
  title={Permanent-Income Inequality},
  author={Abbott, Brant and Gallipoli, Giovanni},
  year={2019},
  institution={Mimeo, University of British Columbia}
}