[This paper contains the formulation of the theoretical restrictions on the labor supply functions of the husband and wife in a model of family labor supply in a manner that makes them readily amenable to test and, if they are not rejected, to imposition onto the data. It also contains an application of the proposed empirical counterparts of the theoretical equations to cross-sectional data from the 1960 U.S. Census of Population.]

In a recent paper in this Review, Lester Thurow presents empirical evidence in apparent contradiction with the conventional life cycle consumption theory enunciated by Franco Modigliani and Richard Brumberg, Menahem Yaari, and James Tobin. That theory predicts no necessary relationship between consumption and income receipts at any age, but Thurow demonstrates a strong relationship and shows that income and consumption expenditure both peak in the age interval 45-54. Thurow's principal explanation for his finding is that credit restrictions prevent consumers from borrowing as much against their future income as they desire at the going interest rate. As long as income tends to increase with age, and discounted future income cannot be fully transferred at the borrowing rate, a consumer's effective net worth increases with age which causes increasing consumption with age. Based on this argument, Thurow recommends government intervention into the consumption loan to allow for optimal adjustment of consumption. Keizo Nagatani explains the same facts by building a model based on the uncertainty of future income. By adjusting expected future income for risk, a consumer will buy less than he would in a riskless environment with the same expected income stream. However, being the typical consumer, he realizes his expected income, and he successively revises his consumption plan upward since his realized income exceeds his risk adjusted income forecast. For this reason, his consumption expenditure and income streams are closely related. Both authors relax a standard neoclassical assumption to obtain their theoretical results: Thurow assumes imperfect credit markets while Nagatani invokes uncertainty.' However, their different explanations lead to different policy implications, since Nagatani's results provide no basis for government intervention to break down institutional barriers in the credit market.2 In this paper, we present an alternative neoclassical model which can explain Thurow's results without resort to either credit imperfections or uncertainty. Rather than treating income as exogenously given, we view earnings as resulting from a life cvcle labor supply decision. If individuals are free to set their hours of work, and if wage rates change systematicallv over the life cycle, the path of consumption of goods will depend on the wage rate at each age unless goods and leisure are independent of each other in utility. There is strong empirical evidence that * Columbia University and the National Bureau of Economic Research. This research was sponsored by a IU.S. Department of Labor Manpower Administration dissertation grant. I am deeply indebted to Edmund Phelps for comments, and to members of my dissertation committee at Princeton: Orley Ashenfelter, Stanley Black, Richard Quandt, Albert Rees, and Harry Kelejian. I retain responsibility for all errors. This paper is not an official National Bureau publication since the findings reported herein have not yet undergone the full critical review accorded the National Bureau's studies, including approval of the Board of Directors. 1 Both authors also discuss alternative explanations such as family composition effects, shifts in preferences, and measurement errors. 2 One might argue that some portion of the risk adjustment of income in the Nagatani model is due to market imperfection. However, in the presence of uncertainty, imperfection is not a well-defined operational concept and specific policy recommendations are more difficult to obtain. I am indebted to Phelps for this point.

In recent years, Congress has considered a variety of work-subsidy programs designed to encourage work among welfare recipients. Many of these programs would subsidize individuals only if they work some minimum number of hours. Commonly used techniques cannot give direct answers to relevant policy questions since a tied offer is involved, and hence the offer cannot be treated as a simple wage change. The essence of the problem involves utility comparisons between two or more discrete alternatives. Such comparisons inherently require information about consumer preferences in a way not easily obtained from ordinary labor-supply functions. To make such comparisons, I present a method for directly estimating consumer indifference surfaces between money income and nonmarket time. Once these surfaces are determined, they can be used to compare a variety of alternative programs to investigate whether or not there is scope for Pareto-optimal redistribution of income transfers and time, improving the general level of welfare of the community at large without reducing the welfare of individuals receiving income transfers. Knowledge of these indifference surfaces allows us to estimate reservation wages to estimate the value of nonworking-women's time (Gronau 1973), laborforce participation functions, hours-of-work functions, and welfare losses due to income tax programs (Harberger 1964). I demonstrate that direct estimation of indifference surfaces allows us, at least in principle, to relax