Abstract
An increase in permanent labor income inequality (PLI) increases aggregate savings because high-PLI households save more than poorer ones. For the asset market to clear, prices must adjust. This paper studies how this change in prices feeds back on the distribution of wealth. If higher households savings leads to more capital accumulation, the interest rate will decrease and wages will increase, “trickling-down” towards poorer households. If it only increases the price of financial assets, interest rates and wages will remain constant, and capital gains will increase the income of richer households. In a heterogeneous agent model with a non-homothetic taste for wealth and imperfect competition, we show that the level of markups dampens the trickle-down effect and increases the valuation effect. Our model calibrated to the U.S. economy suggests that the general-equilibrium effects of rising PLI inequality increased average wealth of the top 0.1% by 16% between 2020 and 1970, against 3% for the average household in the economy.
Citation
@techreport{ElinaHuleux2026,
author = {Eustache Elina and Raphaël Huleux},
year = {2026},
title ={From Income to Wealth Inequality: Trickle-Down vs. Capital Gains}}