Top Incomes, Rising Inequality and Welfare

Publisher: John Wiley & Sons Inc

E-ISSN: 1468-0297|128|608|262-297

ISSN: 0013-0133

Source: THE ECONOMIC JOURNAL, Vol.128, Iss.608, 2018-02, pp. : 262-297

Disclaimer: Any content in publications that violate the sovereignty, the constitution or regulations of the PRC is not accepted or approved by CNPIEC.

Previous Menu Next

Abstract

We introduce permanently shifting income shares into a growth model with workers and capital owners. The model exactly replicates the US time paths of the top quintile income share, capital's share of income and key macroeconomic variables from 1970 to 2014. Welfare effects depend on changes in the time pattern of agents’ consumption relative to a counterfactual scenario that holds income shares and the transfer‐output ratio constant. Short‐run declines in workers’ consumption are only partially offset by longer‐term gains from higher transfers and more capital per worker. The baseline simulation delivers large welfare gains for capital owners and significant welfare losses for workers.