RELATIVE WAGE MOVEMENTS AND THE DISTRIBUTION OF CONSUMPTION

We analyze how relative wage movements among birth cohorts and educati on groups affected the distribution of household consumption and econo mic welfare. Our empirical work draws on the best available cross-sect ional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages amo ng men drove large changes in the distribution of household consumptio n. The results constitute a spectacular failure of between-group consu mption insurance, a failure not explained by existing theories of info rmationally constrained optimal consumption behavior. A welfare analys is indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orde rs of magnitude.