Working Paper: CEPR ID: DP9172
Authors: Richard Blundell; Luigi Pistaferri; Itay Saporta-Eksten
Abstract: In this paper we examine the link between wage inequality and consumption inequality using a life cyclemodel that incorporates household consumption and family labor supply decisions. We derive analyticalexpressions based on approximations for the dynamics of consumption, hours, and earnings of two earnersin the presence of correlated wage shocks, non-separability and asset accumulation decisions. We show howthe model can be estimated and identifi?ed using panel data for hours, earnings, assets and consumption. Wefocus on the importance of family labor supply as an insurance mechanism to wage shocks and fi?nd strongevidence of smoothing of male?s and female?s permanent shocks to wages. Once family labor supply, assetsand taxes are properly accounted for their is little evidence of additional insurance.
Keywords: consumption inequality; labor supply
JEL Codes: E21; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| family labor supply (J22) | consumption smoothing (D15) |
| wage shocks (J31) | consumption smoothing (D15) |
| wage shocks (J31) | labor supply adjustments (J22) |
| labor supply adjustments (J22) | consumption levels (E21) |
| permanent wage shocks (J31) | labor supply changes (J20) |
| family labor supply, assets, and taxes (J22) | additional insurance mechanisms (G52) |
| households adjust labor supply (J22) | wage changes (J31) |