| Economic inequality has been an important feature of the developed economies since the 1970s. Thus understanding the determinants and consequences of economic inequality is central to macroeconomics. This thesis consists of three chapters, each of which focuses on a different aspect of inequality.;First, we investigate the differences in wage inequality between the United States and continental European countries (CEU). Wage inequality has been significantly higher in the US compared to the CEU since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. We study the role of redistributive institutions, particularly progressive income tax policies, for understanding these facts in a human capital accumulation setting.;Second, we focus on statistical modeling of labor income risk over the life cycle. In particular, we investigate whether workers at different ages face the same variance of income risk and how the persistence of earnings changes over the life cycle. Using the PSID data, we estimate a novel specification for idiosyncratic income risk that allows for both the persistence and variance of earnings shocks vary by age. We find, contrary to the previous literature, that persistence is only moderate for young workers (around 0.70) and variance of persistence shocks follows a pronounced U-shaped pattern over the life cycle. We also study consumption-savings implications of these non-flat profiles.;Third, we study differences in health care usage between low- and high-income households. Using data from the Medical Expenditure Panel Survey (MEPS) we find that early in life the rich spend more on health care, whereas midway through life until old age medical spending of the poor exceeds that of the rich. In addition the distribution of medical expenditures of the poor is more widely spread to the tails. To account for these facts we develop and estimate a life-cycle model of two distinct types of health capital: preventive and physical. Preventive health capital determines the distribution of health shocks, whereas physical health capital governs survival probabilities. We use the model to evaluate the effects of the recent health care reform in the economy. Our results suggest that policies encouraging the use of health care by the poor early in life have significant welfare gains, even when fully accounting for the increase in taxes required to pay for them. |
