From Income to Wealth Inequality in the U.S.: General Equilibrium Matters

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Abstract

The past 40 years have been characterized by a decrease in the rate of return on safe assets, an increase in the equity premium, an increase in the price of financial assets, and an increase in labor income and wealth inequality. Using a heterogeneous-agent model featuring permanent labor income inequality, a two-asset structure, and nonhomothetic preferences, we investigate the impact of an increase in permanent labor income inequality on wealth inequality. As rich households save a higher share of their permanent income than poorer ones, a more skewed permanent labor income distribution increases aggregate savings, everything else equal. However, in general equilibrium, with a realistic market structure, an increase in aggregate savings increases mostly the price of capital, not its quantity. This has little impact on the marginal productivity of capital and labor but creates capital gains that push up the top 1% wealth share.

Citation

@techreport{MS24,
author = {Eustache Elina and Raphaël Huleux},
year = {2024},
title ={From Income to Wealth Inequality in the U.S.: General Equilibrium Matters}}