Does Consumer Demand Reproduce Inequality? High-Income Consumers, Vertical Differentiation, and the Wage Structure

This article considers the effects on the wage structure of the U.S. economy’s growing reliance on demand from high-income consumers. Relative to the mass consumers that defined the post–World War II U.S. economy, high-income consumers are willing to pay for high-quality and high-status products. These spending patterns split producers into up-market and down-market segments and stoke winner-take-all dynamics among up-market producers. Economic dependence on high-income consumers could thus lead to a new form of industrial segmentation, based on vertical differentiation by product quality or status. To test these predictions, data from consumer expenditure and wage surveys are linked using input-output tables and used to fit variance function regressions. Results show that industries more dependent on high-income consumers have greater wage inequality. This analysis identifies a new structural source of wage inequality not considered in previous research: the increasingly unequal composition of consumer demand reproduces wage inequality.