Sang Yoon (Tim) Lee
Toulouse School of Economics
Income concentration in the U.S. rose sharply since the 1970s. But the share of wealth held by the top 1 percent increased less, following a U-shaped pattern. This can be partially accounted for by a quantitative model of occupational choice, in which rich individuals choose to become entrepreneurs or managers. Collateral constraints induce entrepreneurs to hold more wealth, while managers earn higher wages as a result of competitive assignments to firms. Declining tax progressivity from 1970 to 2000 replaces top entrepreneurs with top managers, which can account for all of the increase in the share of wages earned by the top 1 percent and 20-25% of the increase in the share of income earned by the top 1 percent. At the same time, the share of wealth held by the top 1 percent initially drops as entrepreneurs decumulate wealth, then rises again as managers accumulate wealth. In a counterfactual analysis, I show that even less progressive taxation can lead to a drop in the concentration of wealth.
We present a model in which human capital investments occur over the life-cycle and across generations, à la Becker and Tomes (1986), also featuring incomplete markets and government transfer programs. The human capital technology features multiple stages of investment during childhood, a college decision, and on-the-job accumulation. The model can jointly explain a wide range of intergenerational relationships, such as the intergenerational elasticities (IGE) of lifetime earnings, college attainment and wealth, while remaining empirically consistent with cross-sectional inequality. Much of life-cycle inequality is determined early in life, which in turn is explained in large part by parental background. The model implies that this is mainly due to early investments in children made by young parents, so life-cycle constraints these parents face are important for understanding the persistence of economic status across generations. Education subsidies, especially early on, can significantly reduce the intergenerational persistence of economic status.
Going to college is a risky investment in human capital. However, we highlight two options inherently embedded in college education that mitigate this risk: (i) college students can quit without completing four-year degrees after learning about their post-graduation wages and (ii) college graduates can take jobs that do not require four-year degrees (i.e., underemployment). These options reduce the chances of falling in the lower end of the wage distribution as a college graduate, rendering standard mean-variance calculations misleading. We show that the interaction between these options and the rising wage dispersion, especially among college graduates, is key to understanding the muted response of college enrollment and graduation rates to the substantial increase in the college wage premium in the United States since 1980. Furthermore, we find that subsidies inducing marginal students to attend colleges will have a negligible net benefit: Such students are far more likely to drop out of college or become underemployed even with a four-year degree, implying only small wage gains from college education.
We employ equality of opportunity (EOP) definitions from the literature on distributive justice to a quantitative model featuring intergenerational human capital investments and luck. When calibrated to the U.S., the model-implied degree of EOP differs substantially depending on whether one consider it ethical to reward offspring for the effort of previous generations. Despite reducing intragenerational inequality, education subsidies do little to promote EOP. This is because if one thinks intergenerational investments should be rewarded, there is little room for improvement to begin with; In the opposite case, much stronger redistribution is needed for the policies to have a quantitative impact.
We present a model of endogenous schooling and earnings to isolate the causal effect of parents' education on children's education and earnings outcomes. The model suggests that parents' education is positively related to children's earnings, but its relationship with children's education is ambiguous. Identification is achieved by comparing the earnings of children with the same education, whose parents have different levels of education. An extended version of the model with heterogeneous tastes for schooling is estimated using the HRS data. The empirically observed positive OLS coefficient obtained by regressing children's schooling on parents' schooling is mainly accounted for by the correlation between parents' schooling and children's unobserved tastes for schooling. This is countered by a negative, structural relationship between parents' and children's schooling choices, resulting in an IV coefficient close to zero when exogenously increasing parents' schooling. Nonetheless, an exogenous one-year increase in parents' schooling increases children's lifetime earnings by 1.2 percent on average.
We analyze the effect of technological change on inequality using a novel framework that integrates an economy's skill distribution with its occupational and industrial structure. Individuals become a manager or a worker based on their managerial vs. worker skills, and workers further sort into a continuum of tasks (occupations) ranked
by skill content. Our theory dictates that faster technological progress for middle-skill tasks not only raises the employment shares and relative wages of lower- and higher-skill occupations (horizontal polarization among workers), but also raises those of managers over workers as a whole (vertical polarization). Both dimensions of polarization are faster within sectors that depend more on middle-skill tasks and less on managers. This endogenously leads to faster TFP growth among such sectors, whose employment and value-added shares shrink if sectoral goods are complementary (structural change). We present several novel facts that support our model, followed by a quantitative analysis showing that task-specific technological progress–which was fastest for occupations embodying routine-manual tasks but not interpersonal skills–is important for understanding changes in the sectoral, occupational, and organizational structure of the U.S. economy since 1980, much more so than skill-biased and sector-specific technological changes.