IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Consumption inequality and family labor supply

  • Luigi Pistaferri

    (Stanford University)

  • Itay Saporta-Eksten

    (Stanford University)

  • Richard Blundell

    (University College London)

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 labor supply as an insurance mechanism to wage shocks and find strong evidence of smoothing of male’s and female’s permanent shocks to wages. Once family labor supply, assets and taxes are properly accounted for their is little evidence of additional insurance.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 322.

in new window

Date of creation: 2014
Date of revision:
Handle: RePEc:red:sed014:322
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
Web page:

More information through EDIRC

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.:

as in new window
  1. Chul-In Lee, 2001. "Finite Sample Bias In Iv Estimation Of Intertemporal Labor Supply Models: Is The Intertemporal Substitution Elasticity Really Small?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 638-646, November.
  2. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  3. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
  4. Fatih Guvenen, 2004. "Learning your Earning: Are Labor Income Shocks Really That Persistent?," 2004 Meeting Papers 177, Society for Economic Dynamics.
  5. Orazio Attanasio & Hamish Low & Virginia Sanchez-Marcos, 2008. "Explaining Changes in Female Labor Supply in a Life-Cycle Model," American Economic Review, American Economic Association, vol. 98(4), pages 1517-52, September.
  6. Primiceri, Giorgio E. & van Rens, Thijs, 2009. "Heterogeneous life-cycle profiles, income risk and consumption inequality," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 20-39, January.
  7. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  8. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2007. "Consumption and Labour Supply with Partial Insurance: An Analytical Framework," CEPR Discussion Papers 6280, C.E.P.R. Discussion Papers.
  9. Browning, Martin & Hansen, Lars Peter & Heckman, James J., 1999. "Micro data and general equilibrium models," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 8, pages 543-633 Elsevier.
  10. Bénabou, Roland, 2000. "Tax And Education Policy In A Heterogeneous Agent Economy: What Levels Of Redistribution Maximize Growth And Efficiency?," CEPR Discussion Papers 2446, C.E.P.R. Discussion Papers.
  11. Tullio Jappelli & Luigi Pistaferri, 2009. "The Consumption Response to Income Changes," CSEF Working Papers 237, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  12. Hamish Low & Costas Meghir & Luigi Pistaferri, 2006. "Wage risk and employment risk over the life cycle," IFS Working Papers W06/27, Institute for Fiscal Studies.
  13. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  14. Cunha, Flavio & Heckman, James J. & Navarro, Salvador, 2004. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," IZA Discussion Papers 1437, Institute for the Study of Labor (IZA).
  15. Greg Kaplan & Giovanni L. Violante, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," NBER Working Papers 17338, National Bureau of Economic Research, Inc.
  16. Richard Blundell & Hamish Low & Ian Preston, 2013. "Decomposing changes in income risk using consumption data," Quantitative Economics, Econometric Society, vol. 4(1), pages 1-37, 03.
  17. Fatih Guvenen & Anthony Smith, 2010. "Inferring labor income risk from economic choices: an indirect inference approach," Staff Report 450, Federal Reserve Bank of Minneapolis.
  18. Melvin Stephens, 2002. "Worker Displacement and the Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 20(3), pages 504-537, July.
  19. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  20. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
  21. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  22. Fatih Guvenen, 2005. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," Macroeconomics 0507004, EconWPA.
  23. Carroll, Daniel R. & Young, Eric R., 2011. "The long run effects of changes in tax progressivity," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1451-1473, September.
  24. Michael P. Keane, 2011. "Labor Supply and Taxes: A Survey," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 961-1075, December.
  25. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
  26. Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers 3632, C.E.P.R. Discussion Papers.
  27. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  28. John Bound & Alan B. Krueger, 1989. "The Extent of Measurement Error In Longitudinal Earnings Data: Do Two Wrongs Make A Right?," NBER Working Papers 2885, National Bureau of Economic Research, Inc.
  29. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
  30. Heckman, James J, 1974. "Life Cycle Consumption and Labor Supply: An Explanation of the Relationship Between Income and Consumption Over the Life Cycle," American Economic Review, American Economic Association, vol. 64(1), pages 188-94, March.
  31. Greg Kaplan & Giovanni L. Violante, 2009. "How Much Consumption Insurance Beyond Self-Insurance?," NBER Working Papers 15553, National Bureau of Economic Research, Inc.
  32. Johanna Wallenius, 2011. "Human Capital Accumulation and the Intertemporal Elasticity of Substitution of Labor: How Large is the Bias?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 577-591, October.
  33. Heckman, James J & Macurdy, Thomas E, 1980. "A Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 47-74, January.
  34. 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 503-43, May.
  35. Del Boca, Daniela & Lusardi, Annamaria, 2002. "Credit Market Constraints and Labor Market Decisions," IZA Discussion Papers 598, Institute for the Study of Labor (IZA).
  36. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
  37. MaCurdy, Thomas E, 1983. "A Simple Scheme for Estimating an Intertemporal Model of Labor Supply and Consumption in the Presence of Taxes and Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 265-89, June.
  38. Richard Blundell & Antoine Bozio & Guy Laroque, 2011. "Labor Supply and the Extensive Margin," American Economic Review, American Economic Association, vol. 101(3), pages 482-86, May.
  39. Hamish Low, 2005. "Self-Insurance in a Life-Cycle Model of Labor Supply and Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 945-975, October.
  40. Orazio Attanasio & Gabriella Berloffa & Richard Blundell & Ian Preston, 2002. "From Earnings Inequality to Consumption Inequality," Economic Journal, Royal Economic Society, vol. 112(478), pages C52-C59, March.
  41. Katja Kaufmann & Luigi Pistaferri, 2009. "Disentangling Insurance and Information in Intertemporal Consumption Choices," American Economic Review, American Economic Association, vol. 99(2), pages 387-92, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed014:322. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.