DP3040 Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality

Author(s): Raquel Fernández , Nezih Guner , John Knowles

Publication Date: November 2001

Keyword(s): education , assortative matching , fertility , growth , human capital

JEL(s): D31 , I21 , J12 , J31

Programme Areas: International Macroeconomics , Labour Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP3040.asp

This Paper examines the interactions between household matching, inequality, and per capita income. We develop a model in which agents decide whether to become skilled or unskilled, form households, consume and have children. We show that the equilibrium sorting of spouses by skill type (their correlation in education) is increasing as a function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting, wage inequality, per capita income and fertility differentials are positively correlated across steady states. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses’ education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables.