Working Paper: NBER ID: w18445
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 cycle model that incorporates household consumption and family labor supply decisions. We derive analytical expressions based on approximations for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, non-separability and asset accumulation decisions. We show how the model can be estimated and identified using panel data for hours, earnings, assets and consumption. We focus on the importance of family labour supply as an insurance mechanism to wage shocks and find strong evidence of smoothing of males and females permanent shocks to wages. Once family labor supply, assets and taxes are properly accounted for their is little evidence of additional insurance.
Keywords: Consumption inequality; Family labor supply; Wage shocks; Consumption smoothing
JEL Codes: E21; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wage shocks (J31) | Consumption growth (E20) |
| Labor supply adjustments (J22) | Consumption growth (E20) |
| Wage shocks (J31) | Labor supply adjustments (J22) |
| Labor supply adjustments (J22) | Consumption smoothing (D15) |
| Wage shocks (J31) | Consumption growth through Labor supply adjustments (J49) |
| Low asset accumulation (D14) | Reliance on Labor supply adjustments for consumption smoothing (D15) |
| Wage decline (J31) | Labor supply increases (J20) |
| Elasticity of labor supply (J20) | Response of consumption to wage shocks (F62) |
| External insurance mechanisms (G22) | Effectiveness of labor supply as a smoothing tool (J29) |