Household Search or Individual Search: Does it Matter? Evidence from Lifetime Inequality Measures

The standard study of earnings inequality builds inequality indexes based on a cross-section of individual earnings. While this information is useful, it only offers an incomplete picture of the extent and the impact of inequality. First, it ignores that individuals may move between different points of the cross-sectional earnings distribution over the course of their life. Second, it ignores that most individuals live in households that pool resources. In this paper we attempt to remove these two limitations by developing and estimating a household search model of the labor market. This procedure allows us to build lifetime inequality measures taking into account earnings mobility across the cross-sectional distribution over time and to construct inequality measures at the household level and not only at the individual level. In allowing for household search we also provide a contribution to the labor market search literature since the overwhelming majority of estimated search models ignores the existence of the household as a crucial unit of labor market decisions. We estimate the model on the Survey of Income and Program Participation (SIPP) since it provides accurate information about the determinants of the income of individual households in the US. We find that while cross-sectional household earning inequality increased significantly over the 1990s and early 2000s, there was a slower increase in lifetime household inequality over the same period. This difference is more pronounced when we look at individuals and interestingly it is different between men and women: lifetime inequality increased more than cross-sectional inequality for wives while the opposite was true for husbands.