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Journal Article
Top Income Inequality in the 21st Century: Some Cautionary Notes
We revisit recent empirical evidence about the rise in top income inequality in the United States, drawing attention to key issues that we believe are critical for an informed discussion about changing inequality since 1980: the definition of income (labor versus total), the unit of analysis (individual versus tax unit), the importance of partnership and S-corporation income, income shifting between the corporate and personal sectors in response to tax incentives, the definition of the top of the distribution, and trends in the middle and bottom of the distribution. Our goal is to inform ...
Working Paper
Optimal Income Taxation: An Urban Economics Perspective
We derive an optimal labor income tax rate formula for urban models in which tax rates are determined by traditional forces plus a new term arising from urban forces: house price, migration and agglomeration effects. Based on the earnings distributions and housing costs in large and small US cities, we find that in a benchmark model (i) optimal income tax rates are U-shaped, (ii) urban forces serve to raise optimal tax rates at all income levels and (iii) adopting an optimal tax system induces agents with low skills to leave large, productive cities. While agglomeration effects enter the ...
Working Paper
Firming Up Inequality
We use a massive, matched employer-employee database for the United States to analyze the contribution of firms to the rise in earnings inequality from 1978 to 2013. We ?nd that one-third of the rise in the variance of (log) earnings occurred within firms, whereas two-thirds of the rise occurred between firms. However, this rising between-firm variance is not accounted for by the firms themselves: the firm-related rise in the variance can be decomposed into two roughly equally important forces?a rise in the sorting of high-wage workers to high-wage firms and a rise in the segregation of ...
Working Paper
Because of Monopolies, Income Inequality Significantly Understates Economic Inequality
In social science research, household income is widely used as a stand-in for, or approximation to, the economic well-being of households. In a parallel way, income-inequality has been employed as a stand-in for inequality of economic well-being, or for brevity, "economic-inequality." But there is a force in market economies, ones with extensive amounts of monopoly, like the United States, which leads income-inequality to understate economic-inequality. This force has not been recognized before and derives from how monopolies behave. Monopolies, of course, raise prices. This reduces the ...
Working Paper
The Impact of Racial Segregation on College Attainment in Spatial Equilibrium
This paper seeks to understand the forces that maintain racial segregation and the implications for the Black-White gap in college attainment. We incorporate race into an overlapping-generations spatial-equilibrium model with neighborhood spillovers. The model incorporates race in three ways: (i) a Black-White wage gap, (ii) an amenity externality—households care about the racial composition of their neighbors—and (iii) an additional barrier to moving for Black households. These forces quantitatively account for all of the racial segregation and 80% of the Black-White gap in college ...
Working Paper
The Macroeconomic Effects of Neighborhood Policies: A Dynamic Analysis
We study the macroeconomic effects of neighborhood-specific policies in a general equilibrium model of a city with endogenous residential sorting and educational investment. A key feature of the model is the presence of endogenous local spillovers that depend on the distribution of families across neighborhoods. We analyze three policies: a housing-voucher policy inspired by the MTO program, which enables poor families to relocate to low-poverty neighborhoods; a place-based transfer (PBT) policy that provides monetary transfers to families in poor neighborhoods; and a place-based investment ...
Working Paper
Has income inequality or media fragmentation increased political polarization?
The increasing polarization of Congressional voting patterns has been attributed to factors including generational shifts, economic conditions, increased media fragmentation, and greater income inequality. The first of these factors is difficult to test with time series data owing to the low frequency of generational shifts, while the tendency of business cycles to reverse suggests that economic cycles are unable to account for long-term shifts in polarization. This leaves two main possible long-run drivers: the increasingly fragmented state of American media as stressed by Prior (2005, 2007) ...
Report
An Assignment Model of Knowledge Diffusion and Income Inequality
Randomness in individual discovery disperses productivities, whereas learning from others keeps productivities together. Long-run growth and persistent earnings inequality emerge when these two mechanisms for knowledge accumulation are combined. This paper considers an economy in which those with more useful knowledge can teach others, with competitive markets assigning students to teachers. In equilibrium, students with an ability to learn quickly are assigned to teachers with the most productive knowledge. This sorting on ability implies large differences in earnings distributions ...
Working Paper
Market Power, Inequality, and Financial Instability
Over the last four decades, the U.S. economy has experienced a few secular trends, each of which may be considered undesirable in some aspects: declining labor share; rising profit share; rising income and wealth inequalities; and rising household sector leverage and associated financial instability. We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends. We derive macroprudential policy implications for financial stability.
Working Paper
Cyclical Labor Income Risk
We investigate cyclicality of variance and skewness of household labor income risk using PSID data. There are five main findings. First, we find that head's labor income exhibits countercyclical variance and procyclical skewness. Second, the cyclicality of hourly wages is mutted, suggesting that head's labor income risk is mainly coming from the volatility of hours. Third, younger households face stronger cyclicality of income volatility than older ones, although the level of volatility is lower for the younger ones. Fourth, while a second earner helps lower the level of skewness, it does not ...