Permanent-Income Inequality


We examine two alternative representations of lifetime welfare for individuals and households, based on consumption flows and permanent income. We suggest a procedure to recover these measures directly from microdata. For the 1983-2016 period, we show that our measures indicate significant growth in welfare inequality. We quantify the offsetting effects of higher consumption levels and inequality on aggregate welfare.

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Abstract. We examine two alternative welfare representations and empirically characterize their distribution across individuals and households. Through certainty equivalent consumption (CE) measures, we show that dispersion of current earnings, expenditures, and net-worth overstate welfare inequality. This is largely due to the unaccounted value of future earnings, which we call human wealth. The latter mitigates permanent-income inequality, though its influence is diminished by the growing importance of assets in lifetime wealth. Average expenditures and CE inequality roughly doubled between 1983 and 2016 and, to weigh these offsetting forces, we decompose aggregate welfare changes into contributions from the level and dispersion of consumption, as well as uncertainty and demographic composition. About 1/4 of the welfare gains from higher consumption have been lost to rising inequality, with most of the losses accruing after 2000.

Citation

@techreport{abbott-gallipoli-PI,
  title={Permanent-Income Inequality},
  author={Abbott, Brant and Gallipoli, Giovanni},
  year={2021},
  institution={WP UBC and Queen's }
}