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 }
}

Firm Heterogeneity in Skill Returns


Are skills rewarded differently across firms? Is this reflected in worker sorting across employers? We use administrative data linking employers and employees in conjunction with measures of cognitive and non-cognitive skills to examine these questions. Returns are heterogeneous across firms. Workers respond by selecting employers that better reward their bundle of skills. Worker-firm skill complementarities contribute to the thick right tail in the distribution of earnings, pushing up both average labor market returns and their dispersion.
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Abstract. This paper presents new evidence on worker–firm complementarities. We combine matched employer-employee data with direct measures of workers’ cognitive and noncognitive skills, and propose an empirical approach that separately identifies the firm-level return for each attribute. We find that similar skills command different returns across employers and that workers’ sorting into firms depends on returns to both attributes. We derive theoretical restrictions that characterize many-to-one matching in employer-employee data, linking within-firm skill dispersion to between-firm differences in average skills. Estimates support these restrictions. Firm heterogeneity in skill returns raises both the average level and dispersion of earnings.

Citation

@techreport{BEG2020,
  title={Firm Heterogeneity in Skill Returns},
  author={Boehm, Michael J. and Esmkhani, Khalil and Gallipoli, Giovanni},
  year={2020},
  institution={Discussion Paper}
}

Sectoral Digital Intensity and GDP Growth After a Large Employment Shock


We develop and estimate a simple state-dependent model of output dynamics. The model builds on the original insights of Okun (1963), generalizing them to multiple sectors and locations. Our simple approach allows for heterogeneity in GDP sensitivity to employment changes. The suggested algorithm can be used to project output across industries and places with minimal data and computational requirements.

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Abstract.

We examine the dynamics of GDP following an economy-wide pandemic shock that curtails physical mobility and the ability to perform certain tasks at work. We examine whether greater reliance on digital technologies has the potential to mediate employment and productivity losses. We employ industry-level indices of task-based digital intensity and ability to work from home (“home-shorability”), in conjunction with publicly available data on employment and GDP for Canada, and document that: (i) employment responses after the onset of the shock are milder in digitally-intensive sectors; (ii) conditional on the size of employment
changes, GDP responses are less extreme in IT-intensive sectors. We suggest a simple state-dependent algorithm for predicting output dynamics as a function of employment across industries and locations with different digital intensities. In our baseline scenario, the aggregate output returns to pre-crisis levels eight quarters after the initial shock onset, although we find significant heterogeneity in recovery patterns across sectors.

Citation

@techreport{gallipoli-makridis-Okun,
  title={Sectoral Digital Intensity and GDP Growth After a Large Employment Shock: A Simple Extrapolation Exercise},
  author={Gallipoli, Giovanni and Makridis Christos},
  year={2021},
  institution={WP UBC and MIT}
}

Consumption and Income Inequality across Generations


How much of the cross-sectional dispersion of income and consumption can be accounted for by parental heterogeneity and family background? How strong are intergenerational linkages? We examine data on expenditures and income of parent-child pairs and document the presence of significant family persistence in earnings, consumption, saving behaviours, and marital sorting patterns. However, we also show that idiosyncratic (family independent) heterogeneity has a quantitatively bigger role than parental effects for the evolution of cross-sectional inequality.
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Abstract. We characterize the joint evolution of cross-sectional inequality in earnings, other sources of income, and consumption across generations in the U.S. To account for cross-sectional dispersion, we estimate a model of intergenerational persistence and separately identify the influences of parental factors and of idiosyncratic life-cycle components. We find evidence of family persistence in earnings, consumption and saving behaviours, and marital sorting patterns. However, the quantitative contribution of idiosyncratic heterogeneity to cross-sectional inequality is significantly larger than parental effects. Our estimates imply that intergenerational persistence is not high enough to induce further large increases in inequality over time and across generations.

Citation

@techreport{GLM,
  title={Consumption and Income Inequality across Generations},
  author={Gallipoli, Giovanni and Low, Hamish and Mitra, Aruni},
  year={2020},
  institution={Discussion Paper}
}

Piercing the “Payoff Function” Veil: Tracing Beliefs and Motives


We develop a non-intrusive approach to experimentally gauge the way agents make their choices. We document the presence of significant heterogeneity in the decision-making process of agents within an interactive setting. The setting is designed to elicit beliefs and motives of agents.

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Abstract. This paper develops an experimental methodology that allows the identification of decision-making processes in interactive settings using tracking of non-choice data. This non-intrusive and indirect approach provides essential information for the characterization of beliefs. The analysis reveals significant heterogeneity, which is reduced to two broad types, differentiated by the importance of pecuniary rewards in agents’ payoff function. Most subjects maximize monetary rewards by best responding to beliefs shaped by recent history. Others are able to identify profit-maximizing actions but choose to systematically deviate from them. The interaction among different types is key to understanding aggregate outcomes.

Citation

@techreport{FGH1_2019,
  title={Piercing the ``Payoff Function'' Veil: Tracing Beliefs and Motives},
  author={Fenig, Guidon and Gallipoli, Giovanni and Halevy, Yoram},
  year={2018},
  note={Working Paper},
  institution={University of Toronto}
  }

Revisiting the Relationship Between Unemployment and Wages


We investigate the empirical relationship between wages and labor market conditions.

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Abstract. We investigate the empirical relationship between wages and labor market conditions. Following work histories in the NLSY79 we document that the relationship between wages and unemployment rate differs across occupations. The results hold after controlling for unobserved match quality. This suggests that evidence about history-dependence of wages obtained from pooled samples conceals significant differences and provides an imprecise description of earning dynamics. We examine these discrepancies and offer new evidence suggesting that the sensitivity of wages to current unemployment is linked to the prevalence of performance pay.

Citation


	

Social Security, Endogenous Retirement and Intra-household Cooperation


We model the retirement incentives induced by the U.S. Social Security system in a framework that allows for different degrees of cooperation and strategic interaction between spouses.

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Abstract. This paper studies the retirement incentives induced by the U.S. Social Security system in a framework which allows for different degrees of cooperation and strategic interaction between spouses. We develop a model in which spouses maximize joint household utility, subject to the additional constraint that neither partner  finds it optimal to deviate from the best constrained household allocation. We show that accounting for \non- cooperative” behavior through this additional constraint can rationalize various choices of older couples observed in the 1932-42 cohort of the Health and Retirement Study. Non-cooperative behavior helps with two puzzles in the retirement literature:  (i) the clustering of benefit claiming at age 62 despite significant gains associated to delayed claiming by husbands; and (ii) the joint benefit claiming of couples. We contrast our  findings to those from a unitary model of the household, extended to include a process for declining health, and show that the latter can rationalize neither early nor joint claiming behavior if individuals can independently make benefit and labor force participation decisions.

Citation

@techreport{turner2008social,
  title={Social Security, endogenous retirement and intrahousehold cooperation},
  author={Turner, Laura and Gallipoli, Giovanni and others},
  year={2013},
  institution={UBC Working paper}
}

Non-Convexities in Dynamic Programming Problems


We study the properties of models where agents choose over non-convex budget sets due to extensive margin decisions and  fixed costs.

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Abstract. Models where agents choose over non-convex budget sets are commonly used in the analysis of economic problems with extensive margin decisions and  fixed costs. Their solutions have interesting and distinctive features that are especially relevant in quantitative applications.  We describe how problems with non-convex choice sets differ from standard problems and investigate under which circumstances the inclusion of random shocks makes their solution identical to the solution of standard problems. A simple framework is provided for the analysis of these problems and a numerical example is illustrated.

Citation

@article{gallipoli2008non,
  title={Non-convexities in dynamic programming problems},
  author={Gallipoli, Giovanni and Nesheim, Lars},
  year={2013}
}

How Robust is the Skill-Dispersion-Complementarity Hypothesis?


We examine the empirical robustness of the hypothesis that countries with higher skill dispersion specialize in sectors characterized by a submodular production function.

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Abstract. We explore the robustness of the hypothesis, First put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer benefits from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.

Citation

@misc{bombardini2015robust,
  title={How Robust is the Skill-Dispersion-Complementarity Hypothesis?},
  author={Bombardini, Matilde and Gallipoli, Giovanni and Pupato, Germ{\'a}n},
  year={2015}
}

Household Responses to Individual Shocks: Disability and Labour Supply

We study how changes in health status affect the labor supply and consumption choices of individuals and couples. We find evidence of non-cooperative behavior in couples and quantify its implications for marital insurance.

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Abstract. How do people respond to idiosyncratic shocks? Using longitudinal data from the Canadian Survey of Labour and Income Dynamics we use variation in health status to develop and estimate a life cycle framework which rationalizes observed responses of individuals and couples to disability shocks. Two puzzling findings associated with disability onset motivate our work: (1) the almost complete absence of added worker e effects within households and, (2) the fact that single workers’ labor supply responses to disability shocks are larger and more persistent than those of married workers. We argue that these facts are consistent with optimal life cycle behavior when we account for the interaction of two mechanisms: first, a dynamic human capital accumulation motive linking wages to labor supply; second, the ability of spouses to transfer time through home production. We provide evidence supporting the empirical relevance of both these mechanisms and show that dynamic labor supply decisions depend crucially on the interaction of the two. Our findings suggest that the persistence of measured wage shocks may be in part a by-product of optimal individual responses.

Citation

@article{gallipoli2009household,
  title={Household Responses to Individual Shocks: Disability and Labour Supply},
  author={Gallipoli, Giovanni and Turner, Laura},
  year={2009}
}