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Household and Individual Decision-Making Over the Life Cycle: A First Look at Evidence from Peruvian Cohorts

Author

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  • Jaime Saavedra-Chanduví
  • Martin Valdivia

Abstract

Peruvian society has achieved significant improvements in terms of lower fertility and mortality over the last forty years, which has brought down population growth rates to less than 1. 2% a year. These improvements have led, on average, to a demographic transition with lower dependency ratios. In general, this transition increases the ability of the society to take proper care of its non-working population groups, children and the elderly, which may be reflected in changes in household structure. We identify stylized facts about the implications of these changes at the micro level through the use of pseudo-panels from household-level data for Peru. We calculate age, cohort and year effects for variables related to household structure, educational attainment, labor force participation and savings. We find some evidence that suggests differences, by educational level, in the Peruvian demographic transition. Household size is smaller for the younger cohorts in all households but those with less educated heads. We argue that these different profiles are explained by the fact that reductions in fertility have not reached the less educated. On the one hand, these differences in household size patterns are similar to those in the number of children. On the other hand, cohort patterns in family living arrangements—i. e. , households with extended families—are similar across educational groups. However, family living arrangements change throughout the life cycle, in the sense that extended families are more common for households with very young (under 25) and elderly (over 60) heads. These changes in family arrangements over the life cycle add confusion to the meaning of headship, since in some cases the household reports as its head the older member and in other cases the main income earner. We also find that younger cohorts are more educated, are larger than older ones, and show lower returns to education. This is consistent with an increase in relative supply of educated workers that outpaces the increase in relative demand induced by economic growth, under the assumption of imperfect substitutability between equally educated workers of different cohorts. Finally, we show that intergenerational family arrangements over the life cycle limit the ability of the life cycle hypothesis (LCH) to explain household savings behavior. We find evidence that Peruvian households, especially the less educated, smooth consumption over the life cycle, not only through the typical saving-dissaving mechanism, but also by smoothing income. Net cash transfers, or living arrangements between parents and their offspring, play an important role in this income smoothing.

Suggested Citation

  • Jaime Saavedra-Chanduví & Martin Valdivia, 2000. "Household and Individual Decision-Making Over the Life Cycle: A First Look at Evidence from Peruvian Cohorts," Research Department Publications 3122, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:3122
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    References listed on IDEAS

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    1. Jaime Saavedra-Chanduví, 1998. "¿Crisis real o crisis de expectativas? El empleo en el Perú antes y después de las reformas estructurales," Research Department Publications 4149, Inter-American Development Bank, Research Department.
    2. Marco Terrones & César Calderón, 1993. "El ciclo económico en el Perú," Documentos de Investigación dt20, Grupo de Análisis para el Desarrollo (GRADE).
    3. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 705-746.
    4. Deaton, A. & Paxson, C., 1998. "Saving and Growth: Another Look at the Cohort Evidence," Papers 182, Princeton, Woodrow Wilson School - Development Studies.
    5. Suzanne Duryea & Miguel Székely, 1998. "Labor Markets in Latin America: A Supply-Side Story," Research Department Publications 4120, Inter-American Development Bank, Research Department.
    6. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-1137, December.
    7. Orazio P. Attanasio, 1998. "Cohort Analysis of Saving Behavior by U.S. Households," Journal of Human Resources, University of Wisconsin Press, vol. 33(3), pages 575-609.
    8. Orazio P. Attanasio, 1993. "A Cohort Analysis of Saving Behavior by U.S. Households," NBER Working Papers 4454, National Bureau of Economic Research, Inc.
    9. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-543, May.
    10. Jaime Saavedra & Alberto Chong, 1999. "Structural reform, institutions and earnings: Evidence from the formal and informal sectors in urban Peru," Journal of Development Studies, Taylor & Francis Journals, vol. 35(4), pages 95-116.
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    Cited by:

    1. repec:idb:idbbks:328 is not listed on IDEAS
    2. Olivera, Javier, 2002. "Determinantes del nivel de pensiones en el Sistema Privado de Pensiones
      [Determinants of the pensions in the Peruvian Private Pension System]
      ," MPRA Paper 66683, University Library of Munich, Germany.
    3. Orazio P. Attanasio & Miguel Székely & Jere R. Behrman & Suzanne Duryea, 2003. "The Family in Flux: Household Decision-Making in Latin America," IDB Publications (Books), Inter-American Development Bank, number 43018 edited by Orazio P. Attanasio & Miguel Székely, February.

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