Education and Self-Employment: Changes in Earnings and Wealth Inequality

The author quantitatively studies the interaction between education and occupation choices and its implication for the relationship between the changes in earnings inequality and the changes in wealth inequality in the United States over the 1983–2001 period. Among households whose head is a college graduate, the ratio of average household earnings between the self-employed and workers increased by 57 per cent. At the same time, the ratio of the average household wealth increased by 137 per cent. These findings suggest that both earnings and wealth inequality increased over this period. Did this change in relative average earnings lead to the change in relative average wealth? The author builds on a model of wealth distribution to include education and occupation choices, where earnings opportunities are dictated by productivity processes that are education-occupation specific. By calibrating these productivity processes to match the earnings observations separately for 1983 and 2001, the author quantitatively derives the model-implied changes in wealth inequality between different education-occupation groups of households. The results show that this exercise leads to one-third of the change in the relative average wealth between college self-employed and college worker households.