DP9172 Consumption Inequality and Family Labor Supply

Author(s): Richard Blundell, Luigi Pistaferri, Itay Saporta-Eksten
Publication Date: October 2012
Keyword(s): Consumption, Inequality, Labor Supply
JEL(s): E21, J22
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9172

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 identifi?ed 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 fi?nd 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.