A striking feature of U.S. data on income and consumption is that inequality increases with age. Using both panel data and an equilibrium life cycle model, we argue that this is informative for understanding the importance and the characteristics of idiosyncratic labor market risk. We find that uncertainty distributed throughout the working years accounts for 40 percent of life time uncertainty, with the remainder being realized prior to entering the labor market. We estimate that the shocks received over the life cycle contain a highly persistent component, with an autocorrelation coefficient between 0.98 and unity. The joint behavior of earnings and consumption inequality, interpreted using our model, adds to the body of evidence suggesting that labor market risks are imperfectly pooled and that a precautionary motive is an important aspect of U.S. savings behavior. The restrictions imposed by general equilibrium theory play an important role in arriving at each of these conclusions.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7995.
Length: Date of creation: Nov 2000 Date of revision: Handle: RePEc:nbr:nberwo:7995
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Find related papers by JEL classification: E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Angus S. Deaton & Pierre-Olivier Gourinchas & Christina Paxson, 2002.
"Social Security and Inequality over the Life Cycle,"
NBER Chapters,
in: The Distributional Aspects of Social Security and Social Security Reform, pages 115-148
National Bureau of Economic Research, Inc.
[Downloadable!]
Feldstein, Martin & Liebman, Jeffrey B., 2002.
"Social security,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324
Elsevier.
[Downloadable!] (restricted)
Other versions:
Martin Feldstein & Jeffrey B. Liebman, 2001.
"Social Security,"
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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