Relative Wage Movements and the Distribution of Consumption
Sep 01, 1995
Orazio Attanasio and Steven J. Davis

We analyze how relative wage movements across birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws upon the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pre-tax hourly wages drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, and one not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is two orders of magnitude larger than the cost of aggregate consumption variability.