Publication: Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality
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2005
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The MIT Press
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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.
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Quarterly Journal of Economics. 2005, vol. 120, nº 1, p. 273-344