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Income Inequality and Saving
Author(s) -
AlvarezCuadrado Francisco,
ElAttar Vilalta Mayssun
Publication year - 2018
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12236
Subject(s) - economics , inequality , consumption (sociology) , economic inequality , demographic economics , income distribution , distribution (mathematics) , econometrics , percentage point , aggregate (composite) , panel study of income dynamics , labour economics , mathematics , mathematical analysis , social science , materials science , finance , composite material , sociology
Abstract Over the last three decades, the average income for the bottom half of the US distribution increased by 8% while their average saving rate decreased by 8 percentage points. Over the same period, the US experienced a substantial increase in inequality and a continuous decrease in the aggregate saving rate. We propose an explanation based on interpersonal comparisons consistent with these trends. When households care about their consumption relative to others, individual saving rates decrease with reference income while aggregate saving decreases with income inequality. We provide evidence from the PSID and a panel of OECD countries consistent with these predictions.