The Macroeconomic Implications of Rising Wage Inequality in the United States

TLDR

American workers have experienced a rising college premium, a narrowing gender gap, and increasing wage volatility in recent decades. The study examines the quantitative and welfare effects of these wage dynamics. An incomplete‑markets life‑cycle model is used, where individuals decide on education, intrafamily time allocation, and savings. The model reproduces observed trends in inequality of hours, earnings, and consumption, and shows that recent cohorts gain welfare as higher relative wages for college graduates and women increase educational attainment and balance household labor.

Abstract

In recent decades, American workers have faced a rising college premium, a narrowing gender gap, and increasing wage volatility. This paper explores the quantitative and welfare implications of these changes. The framework is an incomplete-markets life cycle model in which individuals choose education, intrafamily time allocation, and savings. Given the observed history of the U.S. wage structure, the model replicates key trends in cross-sectional inequality in hours worked, earnings, and consumption. Recent cohorts enjoy welfare gains, on average, as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household.