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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.

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

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Date of creation: 2014
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Handle: RePEc:red:sed014:322
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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