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American Economic Review Vol. 106 No. 2 2016

Consumption Inequality and Family Labor Supply

Richard Blundell1; Luigi Pistaferri2; Itay Saporta-Eksten3

1 Department of Economics, University College London, and Institute for Fiscal Studies, Gower Street, London WC1E 6BT, UK (e-mail: ) · 2 Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305, Centre for Economic Policy Research, and NBER (e-mail: ) · 3 The Eitan Berglas School of Economics, Tel Aviv University, P.O.B. 39040, Ramat Aviv, Tel Aviv, Israel, 6997801, and Department of Economics, University College London (e-mail: ).

Abstract

We examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions. We derive analytical expressions for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, nonseparability, progressive taxation, and asset accumulation. The model is estimated using panel data for hours, earnings, assets, and consumption. We focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks. Once family labor supply, assets, and taxes are properly accounted for there is little evidence of additional insurance.

DOI
10.1257/aer.20121549
Volume
106
Issue
2
Pages
387-435
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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