The Permanent Income Theory and Occupational Groups
HIS paper presents a test of the permaT nent income theory based on a comparison of the savings-income ratios of different occupations. Specifically, I will test the hypothesis that the proportion of permanent income consumed is independent of the level of permanent income.' This is, of course, only a part of the permanent income theory the other less revolutionary part of the theory which states that consumption is a function of long-run rather than yearly income will not be discussed here. In doing this I will use the Friedman version of the theory rather than the rival Modigliani-Brumberg version.2 This is so because the Friedman version suggests that a person's idea of his permanent income is dominated by his income experience in relatively few years,3 while the Modigliani-Brumberg version leaves the length of the horizon open. Unfortunately, the data used here do not allow one to generalize about the very long-run income experience of households, and hence permit only a test of the Friedman variant. The test used is a comparison of the savingsincome ratios of different occupational groups. Since, for the period covered, occupational grouping was fairly stable, the income of an occupation furnishes a clue to the permanent income of its members. According to the absolute income theory, the higher income occupation should have the lower average propensity to consume. The relative income theory in its cross-section version also implies this.4 The permanent income theory, on the other hand, suggests that there is no tendency for the higher income occupation to have a lower average propensity to consume. This makes it possible to test the permanent income theory by seeing if the absolute income theory and the relative income theory are able to predict significantly better than a naive model. One major advantage of such a test is that, unlike many other tests, it distinguishes sharply between the permanent income theory and the (cross-section) relative income theory.
- DOI
- 10.2307/1924137
- Volume
- 45 (1)
- Pages
- 16
- Export
- BibTeX
- Sources
- openalex crossref