Understanding the Trends in Income, Consumption and Wealth Inequality and How Important are Life-Cycle Effects?

Abstract

Rising inequality in income, wealth and consumption has received a good deal of public attention in the past years. At the same time, also macroeconomists are more and more interested in inequality as they have expanded their models to incorporate heterogeneity in the household sector. We supply these models with empirical benchmarks for their calibration and contribute to the understanding of the reasons underlying the trends in inequality. Specifically, we employ a variance decomposition and estimate life-cycle profiles of inequality in income, consumption and wealth based on two measures of inequality. We deepen the discussion on wealth inequality by evaluating the relative importance of savings, portfolio choice and inheritances for the accumulation of wealth. To do so, we project active and passive savings based on the observed saving and investment behavior of synthetic cohorts from the German Income and Expenditure Survey (EVS).