Topics on Inequality: The Changing Household Composition and Implications for Policy Coordination

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

This project consists of two parts concerned with the determinants as well as the implications of inequality both between people and across countries. The first part studies recent rather dramatic changes in the composition of U.S. households. Between the mid seventies and the beginning of the nineties the share of non-married females grew dramatically in the U.S. (from 17% to 30% in the 30 to 44 age group). At the same time that people are living less as married couples. there has been a steady increase in out of wedlock child-raising that increased the share of single mothers from 12%o to 17% of the total female population, while total fertility remained constant over the same period. There has been another major change in the sane time period: the structure of wages is much different now than twenty five years ago. There has been a modest increase in average wages. together with fairly large increases in the ratio of wages of college to non-college educated and in the ratio of women's to men's wages. This project investigates the contribution of the changes in wages to the aforementioned demographic changes. To this end, a model is constructed where agents differ in age. sex, education. wages, and in the type of family they live. Agents search for a mate, make marital status and fertility decisions and invest in their children's education. The model is calibrated so that it replicates the economic and demographic characteristics of the mid seventies. Next, the model is studied with only changes in wages, absolute and relative (across sexes and education levels) to see how much of the changes in the type of family that people live in can be traced back to changes in wages. The project may have far reaching implications. The findings of a recent body of empirical literature indicate that factors that happen early in life. before age 16, account for most of the differences in lifelong achievements of people. Moreover, it seems that the type of family where children grow up contributes significantly to shape those achievements: the presence of both parents yields more successful children than one parent alone. This implies that a change in household structure of the magnitude observed can shape the characteristics of the next generation of Americans, not only in terms of their average achievements, but probably and in a more dramatic fashion, for the characteristics of inequality. Understanding the mechanisms that generate the changes in family type seems to be a very important task. The second part of the project attempts to understand how differences in the wealth and productivity of nations affect the type of taxing policies that they choose. How do taxes of poorer countries compare to those of richer countries? Why does the U.S. tax capital more intensively than Europe? To answer these questions the investigator develops a model where governments are benevolent towards their own citizens, and choose how to best collect revenue thorough different forms of taxation (corporate taxation, and personal labor income and capital taxation) at different rates. Moreover, these governments cannot commit to future policies, they can always change their mind. In this model government policies of rich and poor countries are interrelated since capital can flow across countries. This part of the project might also shed some new light on the issue of whether it is a good idea that governments can coordinate their policies.