Abstract
Income dynamics differ between groups of households defined by whether the head has university education or not and have changed asymmetrically in Great Britain since 2008. Using a heterogeneous agent incomplete markets model, we examine the quantitative implications of these differences for wealth inequality and for the distribution of conditional welfare losses. Within-group wealth inequality is higher for the non-university group and has increased since 2008 for both groups, while between-group inequality has also increased. Welfare losses are significantly higher for the non-university educated since 2008, and are driven by both a greater fall in mean income and a larger rise in income risk. Non-university educated households, which had initial wealth below the median and net labour income in the lower quintiles, suffered bigger losses. Social insurance policies beyond those currently in place can mitigate such welfare losses via tax and benefit redistributive mechanisms. For the broad majority of households, social insurance is valued more when it insures against the big adverse income shocks.
Highlights
This paper investigates the quantitative impact of heterogeneity in income dynamics on wealth inequality and welfare
We show that a stationary open economy general equilibrium exists, and we ...nd that for the parameter values chosen in the calibration this is unique
We examine the transitional dynamics of this model economy, driven by the heterogeneous changes in income processes from the pre- to the post2008 periods observed in the British Household Panel Study (BHPS) and Wealth and Asset Survey (WAS) data
Summary
This paper investigates the quantitative impact of heterogeneity in income dynamics on wealth inequality and welfare. We study the implications of asymmetric changes in income dynamics, since 2008, on the distribution of conditional welfare losses for these groups. This is motivated by empirical evidence for Great Britain which shows di¤erences in income dynamics between households that vary with respect to university education. Using income data from the British Household Panel Study (BHPS) 1991-2008 and WAS 2010-2016, we ...nd di¤erences in the net labour income processes between groups and that these have changed asymmetrically since 2008.1 mean income was higher for the university educated group over the entire time period
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