Essays on the Macroeconomics of Income Inequality

This thesis consists of three chapters, each of which focuses on different aspects of economic inequality. First, we investigate the differences in wage inequality between the United States and continental European countries (CEU). Wage inequality has been significantly higher in the US compared to the CEU since the 1970s. Moreover, this inequality gap has further widened in the last three decades. We study the role of redistributive institutions, particularly progressive income tax policies, in understanding these facts in a human capital accumulation setting. Second, we focus on statistical modeling of labor income risk over the life cycle. Using the PSID data, we estimate a novel specification for idiosyncratic income risk that allows for both the persistence and variance of earnings shocks vary by age. We find, contrary to the previous literature, that persistence is only moderate for young workers (around 0.70) and variance of persistence shocks follows a pronounced U-shaped pattern over the life cycle. These non-flat profiles have significant welfare implications. Third, we study differences in health care usage between low- and high-income households. We find that early in life the rich spend more on health care, whereas midway through life until old age medical spending of the poor exceeds that of the rich. We explain these differences using life-cycle model of health capital. We then use the model to evaluate the recent health care reform in the US. We find that policies encouraging the use of health care by the poor early in life have significant welfare gains.