Discussion paper

DP9172 Consumption Inequality and Family Labor Supply

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.

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Citation

Blundell, R, L Pistaferri and I Saporta-Eksten (2012), ‘DP9172 Consumption Inequality and Family Labor Supply‘, CEPR Discussion Paper No. 9172. CEPR Press, Paris & London. https://cepr.org/publications/dp9172