Why wealthy Americans work

An ASU economist's research shows that the affluent don't work for more stuff, but for better stuff — and it's reshaping how we think about taxes and incentives.

One of the more persistent puzzles in economics is also one of the simplest to observe: In the U.S., wealthy households work about as much as less affluent ones.

This flies in the face of decades of standard theory, which holds that as people get richer, they should clock out earlier and spend more time enjoying their wealth. A new study, published in The Review of Economic Studies, suggests it is time to revisit that theory.

The paper by Associate Professor of Economics Domenico Ferraro and Vytautas Valaitis of the University of Surrey introduces a new economic model that matches actual spending patterns. It shows that many wealthy people keep working to afford higher-quality, more expensive versions of the things they buy.

When theory doesn't match reality

"The conventional theory of labor supply that we typically teach in undergraduate and graduate courses is at odds with household-level data," says Ferraro. The study shows that employment rates and hours worked remain flat across the wealth distribution, with rich households putting in nearly the same number of hours as poor ones. But most economic models predict the opposite: As wealth rises, work presumably should fall.

The data studied are from 2001–2015 and the Panel Study of Income Dynamics (PSID), a long-running survey of U.S. households.

It's not about more — it's about better

The problem is that traditional models largely ignore consumption quality, focusing only on quantity. Ferraro and Valaitis see this as the key missing piece in explaining why wealthier households continue to work.

In their model, people choose both how much and how nice their consumption is, and wealthier households are shown to keep working to afford higher-quality goods, not necessarily more of them.

The paper shows that richer households do not consume dramatically more, but they do splurge a lot more. Spending is heavily skewed — the richest 10% of households account for about 30% of all money spent. The spending gap comes from the rich paying higher prices for better-quality goods.

Why this changes economic policy

Ferraro's and Valaitis's model also explains how less affluent households adjust when times are tough: by trading down in quality, not quantity. This flexibility is missing from older models, the researchers argue, which helps explain why work hours stay steady across the wealth distribution.

In addition, their model explains why some low-wealth households do not work that much: Thanks to a combination of government safety nets and the ability to adjust consumption quality, they can maintain their basic living standards without needing to work full-time.

This matters for fiscal policy. Rich households are more responsive to changes in wages and taxes under this model because their motivation to work includes maintaining access to high-quality goods. That makes tax policy more impactful than older models suggest, especially for top earners.

"Our research shows that the conventional wisdom that wealth-rich households do not respond to changes in work incentives is misplaced," Ferraro says. "Taxing the labor incomes of the wealthy reduces their hours of work by more than previously thought."

Future tax reforms will be better designed if such insights are taken into account, he adds.

"Our theory suggests that the tax rate for top wage-earners should be much lower than what many existing studies indicate," says Ferraro. "Making the tax system more steeply tilted toward higher earners could be detrimental to the economy."

The authors also highlight how older models significantly overstate optimal tax rates when they do not account for quality-based consumption. Older frameworks suggest a 76% top rate of tax for the highest earners.

But Ferraro's and Valaitis's newer model brings that down to around 60%. For middle- to upper-middle-income households (the top 95% of earners), the optimal tax rate is up to 35 percentage points lower.

A better predictor of spending behavior

The updated model also implies that people, including the wealthy, are more likely to spend extra income than previously thought. Simulations show that the marginal propensity to consume (how much of a $500 windfall a household spends in the short term) is around 20% higher in the new model than in the old one. And this holds even at the top of the wealth distribution.

The findings point to the possibility that government payments, like stimulus checks, could lead people to spend more than expected, especially in places where quality matters to consumers.

The model also opens the door to bigger questions — like how people build skills, choose careers, and accumulate wealth over time.

"My research on this topic only scratches the surface of many interesting and policy-relevant questions," Ferraro says.

In the meantime, his message for economists and policymakers is clear: Assumptions about how wealth affects work need updating.

The wealthy may have more than enough, but in a world where quality matters, they still have something to work for.