Education and Self-Employment: Relationships between Earnings and Wealth Inequality

This paper quantitatively studies the interaction of education and occupation choices and its implication in accounting for changes in the relative wealth of households over 1983-2001 in the United States. Among households whose head is a college graduate, the ratio of the average household wealth between the self-employed and workers has increased by 137%. At the same time, the ratio of average household earnings between them has increased by 57%. These observations show that wealth inequality as well as earnings inequality have increased over this period. Are changes in relative average earnings sucient in accounting for changes in relative average wealth? I build on a model of wealth distribution to include education and occupation choices, where earnings are dictated by education-occupation specic productivity processes. By calibrating these productivity processes to match the earnings observations separately for 1983 and 2001, I quantitatively derive how much this exercise can account for the changes in the relative average wealth of college self-employed households. The results show that it can account for one-third of the change in the relative average wealth between college self-employed and college worker households. This study can identify some institutional changes which could further account for the changes in the wealth inequality observed in the data over the period