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 identified using panel data for hours, earnings, assets and consumption. We focus on the importance of family labour supply as an insurance mechanism to wage shocks and find 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 there is little evidence of additional insurance.
Authors
![Richard Blundell](/sites/default/files/styles/square_desktop/public/2024-03/Richard%20Blundell%20Head.jpg?itok=ow7e9OkA)
CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
![Person graphic](/sites/default/files/styles/square_desktop/public/2022-06/IFS-person-graphic.png?itok=hWCtTSrz)
Stanford University
![Person graphic](/sites/default/files/styles/square_desktop/public/2022-06/IFS-person-graphic.png?itok=hWCtTSrz)
Itay Saporta-Eksten
Working Paper details
- Publisher
- European Central Bank
Suggested citation
R, Blundell and L, Pistaferri and I, Saporta-Eksten. (2014). Consumption inequality and family labor supply. London: European Central Bank. Available at: https://ifs.org.uk/publications/consumption-inequality-and-family-labor-supply (accessed: 30 June 2024).
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