Essays in the Economics of Inequality

Abstract

What are the drivers of recent trends in earnings inequality? What role have economic policies played in this evolution? How should optimal policy relating to inequality and redistribution be designed? Finding answers to these questions is central to improving economic welfare in a world that is experiencing rapid shifts in the distribution of income. This collection of essays contributes to our understanding of the determinants of earnings inequality and the design of optimal redistributive policies.

Chapter 1, co-authored with Jorge Alvarez and Niklas Engbom, uses administrative matched employer-employee data to decompose a decline in earnings inequality in Brazil from 1996 to 2012. Almost half of the overall decline is due to a fall in firm-specific pay differences, while around one quarter of the decline stems from falling pay differences due to unobserved worker characteristics. A large share of the decline is attributable to changes in firms' wage setting policies.

Chapter 2, co-authored with Niklas Engbom, quantifies the contribution of a rise in the minimum wage to Brazil's inequality decline in an equilibrium search model with heterogeneity in worker ability and firm productivity. Monopsonistic competition among firms for workers leads to spillover effects of the minimum wage on higher earnings ranks. We estimate the model using indirect inference and find that the rise in the minimum wage explains 70 percent of the decline in the variance of log earnings.

Chapter 3 examines the interaction between financial frictions, barriers to entry, and firms' extensive margin decisions in a dynamic occupational choice model. Inefficient firm liquidations lead to a substantial welfare loss. Government subsidies to the least productive entrepreneurs can have sizable effects on aggregate productivity. Efficiency implications of such interventions depends crucially on the persistence of the stochastic process underlying entrepreneurs' productivity evolution.

Chapter 4, co-authored with Pedro Olea de Souza e Silva, analyzes retirement savings policies in a model of optimal taxation with unobservable differences in earnings ability and heterogeneity in time preferences. A government with redistributive and paternalistic motives optimally offers low income individuals a one-size-fits-all savings instrument while offering high earners a set of savings policies.