Notes from Gottlieb, Joshua D., David Hémous, Jeffrey Hicks, and Morten G. Olsen. 2023. “The Spillover Effects of Top Income Inequality.” (June 24, 2023).

Key findings Link to heading

  1. Top income inequality within occupations has increased significantly in the United States.
  2. The authors propose a theory where increases in income inequality within a few occupations can “spill over” through consumption into other occupations.
  3. These spillover effects occur when an occupation provides non-divisible services to consumers, with physicians being the prime example.

Main contribution Link to heading

These findings contribute to our understanding of income inequality by suggesting that the increase in top income inequality across various occupations may not require a common explanation. Instead, increases in inequality within specific occupations, such as bankers or CEOs due to deregulation or globalization, may spill over to other high-earning occupations, leading to a broader increase in top income inequality. Additionally, the research highlights the importance of considering the role of non-divisible services in understanding income inequality dynamics.

Theory Link to heading

The paper’s model incorporates spillover effects by considering the consumption of non-divisible services. In the model, there are two groups: widget makers with heterogeneous incomes and doctors with heterogeneous abilities. Each widget maker needs to consume one unit of one doctor’s services, and each doctor can only serve a fixed number of widget makers. This non-divisible consumption and limited capacity for doctors to serve widget makers give rise to a positive assortative matching mechanism.

The spillover effect occurs when there is income inequality within the widget maker group. Higher-income widget makers can afford to consume the services of higher-ability doctors, while lower-income widget makers can only afford lower-ability doctors. This leads to a concentration of higher-ability doctors serving higher-income widget makers, creating a spillover effect of income inequality from the widget maker group to the doctor group.