The Macroeconomic Implications of Rising Wage Inequality in the United States

In recent decades, American workers have faced a rising college pre-mium, 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. We are grateful to Orazio Attanasio, Dirk Krueger, and Fabrizio Perri for help with the CEX data and to Greg Kaplan for outstanding research assistance. Heathcote and Violante thank the National Science Foundation (grant SEP-0418029). Storesletten thanks the Centre of Equality, Social Organization, and Performance, supported by the Research Council of Norway. The opinions expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 682 journal of political econom