Consumption Quality and Employment Across the Wealth Distribution.

This article focuses on explaining the nearly flat relationship between hours worked and wealth observed in U.S. data, a phenomenon that standard heterogeneous-agent incomplete-markets macroeconomic models fail to capture. The authors develop a quantitative general-equilibrium model incorporating a consumption quality choice, non-homothetic preferences, and a multi-sector production structure, where wealthier households consume higher-quality (and more expensive) goods, which raises their marginal utility of consumption and sustains their labor supply. Calibrated to U.S. data, the model successfully replicates the flat employment rates across the wealth distribution and the concentration of consumption expenditures driven primarily by quality rather than quantity differences. Empirical evidence from multiple datasets supports the model's predictions on quality Engel curves and food consumption quality varying with income. The model also implies that labor supply elasticities and optimal tax rates differ substantially from standard models, highlighting the importance of accounting for consumption quality in policy analysis related to taxes and transfers.