The Spillover Effects of Top Income Inequality

Top income inequality in the United States has increased considerably within occupations. This phenomenon has led to a search for a common explanation. The paper presented in this ZEW Research Seminar instead develops a theory where increases in income inequality originating within a few occupations can “spill over” through consumption into others. The authors show theoretically that such spillovers occur when an occupation provides nondivisible services to consumers, with physicians their prime example. Examining local income inequality across U.S. regions, the data suggest that such spillovers exist for physicians, dentists, and real estate agents. Estimated spillovers for other occupations are consistent with the predictions of the authors‘ theory.