Earnings, consumption and lifecycle choices
Costas Meghir,Luigi Pistaferri +1 more
TL;DR: In this article, the authors discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle, highlighting the role of persistence, information, size and insurability of changes in economic resources.
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Abstract: We discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle. We start by analyzing the theoretical impact of income changes on consumption—highlighting the role of persistence, information, size and insurability of changes in economic resources. We next examine the empirical contributions, distinguishing between papers that use only income data and those that use both income and consumption data. The latter do this for two purposes. First, one can make explicit assumptions about the structure of credit and insurance markets and identify the income process or the information set of the individuals. Second, one can assume that the income process or the amount of information that consumers have are known and test the implications of the theory. In general there is an identification issue that has only recently being addressed with better data or better “experiments”. We conclude with a discussion of the literature that endogenizes people’s earnings and therefore change the nature of risk faced by households.
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Figures
Table 5: EWMD Results, from Kaufmann and Pistaferri (2009) 
Figure 5: Estimates of λa from Haider and Solon (2006). 
Figure 1: The response of consumption to a transitory income shock. 
Table 1: The response of consumption to income shocks under quadratic preferences 
Figure 4: Second to fourth order autocovariances of earnings growth, PSID 1967-1997. 
Table 2.1 below shows the value of the marginal propensity to consume κ for various combinations of ρ, θ, and A − a (setting r = 0.02). A number of facts emerge. If the income shock
Citations
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Fiscal Policy and MPC Heterogeneity
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TL;DR: The authors used responses to survey questions in the 2010 Italian Survey of Household Income and Wealth that ask consumers how much of an unexpected transitory income change they would consume, and found substantial heterogeneity in the distribution, as households with low cash-on-hand exhibit a much higher MPC than affluent households.
References
Rising U.S. Earnings Inequality and Family Labor Supply: The Covariance Structure of Intrafamily Earnings
TL;DR: In this paper, the authors studied the labor supply contributions to individual and family earnings inequality during the period of rising wage inequality in the early 1980's and found that labor supply explains little of the rising annual earnings inequality for married men, but over 20 percent of the rise in family inequality and 50 percent of a modest rise in female inequality.
Estimation of the Structural Parameters in a Permanent Income Model
TL;DR: In this paper, the authors apply the "unobservable variable" estimation procedure developed by Zellner (1970), Goldberger (1972), and J6reskog (1973) to a model of the permanent income hypothesis (PIH) and obtain estimates of the marginal propensity to consume (MPC) out of permanent and transitory income.
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