Return to Education, Marriage Market, and Income Inequality

Previous studies decomposing the growth of household income inequality based on marriage market outcomes, find negligible impact for the increase in assortative matching by education. We argue that the observed negligible effect is a consequence of the conditional independence assumption inherent in the decomposition exercise. Using a frictionless matching model with imperfectly transferable utility, we relax this assumption and account for the general equilibrium effect of return to education on marriage market outcomes. Estimation of the model using CPS data demonstrates that accounting for the monetary gains of marriage that drives assortative matching has a sizable impact on the growth of cross-sectional household inequality in the US. Between 1962 and 2023, this factor explains about 40 percent of the rise in Gini coefficient.