The Covariance Structure of Intrafamily Earnings, Rising Inequality and Family Labor Supply

Abstract

This paper uses longitudinal survey data to analyse the relationship between recent increases in individual wage inequality, and individual and family earnings inequality. The analysis compares the implications of a model of intertemporal family labor supply, to those of a model with no behavioral content. The results imply that the fraction of family earnings variance attributable to permanent wage differences is about 70 percent, and remained constant as the total variance of earnings increased during the 1980's. The parameter estimates imply the intertemporal labor supply for males is zero, and for females is about 0.4. The net contribution of behavioral responses to increasing wage inequality reduced the level of family earnings inequality by 14 percent.