Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality

Abstract

This paper examines the interactions between household formation, inequality, and per capita income. We develop a model in which agents decide to become skilled or unskilled and form households. We show that the equilibrium sorting of spouses by skill type (their correlation in skills) is an increasing function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting and wage inequality is positively correlated across steady states and negatively correlated with per capita income. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses' education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables. We also find that sorting and per capita GDP are negatively correlated and that greater discrimination against women leads to more sorting, in line with the predictions of our model.

Gender Asymmetry in Educational and Income Assortative Marriage

“…With increases in their economic independence implied by their high levels of education, women do not necessarily lower the value attached to financial resources of potential spouses. The growing income inequality in recent decades likely increases the costs of women marrying down economically (Fernández, Guner, & Knowles, ). Given a shortage of more‐educated men, women may seek to maximize gains from marriage by evaluating potential spouses more on the basis of income.…”

Education expansion, assortative marriage, and income inequality in China

“…3 The results also show that educational assortative marriage has increased since the 1960s. 4 Many are concerned with the possibility that positive marital assortativeness on the basis of education leads to greater household income inequality (see Fernandez et al, 2005 andKremer, 1997 for theoretical discussions). The research of Burtless (1999) is an early example of an evaluation of the effect of educational assortativeness on inequality using counterfactual analysis.…”

Do Demographics Prevent Consumer Aggregates from Reflecting Micro-Level Preferences?

“…4 There is a substantial body of macroeconomics literature that introduces family-formation decisions in dynamic frameworks. See, for example, Aiyagari et al (2000), Greenwood and Seshadri (2002), Greenwood et al (2005), Fernández et al (2005), Fernández-Villaverde et al (2011), Knowles (2013), among others. 5 To our knowledge, the only linear-aggregation study which allows for time-variant momentary utility functions is Caselli and Ventura (2000).…”