DP4728 Two Views of Inequality Over the Life-Cycle

Author(s): Jonathan Heathcote , Kjetil Storesletten , Giovanni L Violante

Publication Date: November 2004

Keyword(s): wage inequality , consumption inequality , cohort effects , labour supply

JEL(s): C13 , D31 , D91 , J22 , J31

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP4728.asp

Data on the life-cycle profiles of inequality in wages, earnings, hours worked and consumption contains precious information for answering questions about the ability of households to insure labor market risk and about the sources of this risk. This Paper demonstrates that the choice of whether to control for cohort effects or for time effects has a drastic impact on the estimated age profiles for inequality and, thus, on the answers to those questions. It also shows that time effects are required to account for the observed trends in inequality in thirty years of US data, whereas there is no evidence that cohort effects have been important.