Journal Article

Consumption inequality and family labor supply

Date: 01 February 2016
Publisher: American Economic Association
Published in: American Economic Review , Vol. 106, No. 2, pp. 387-435
JEL classification: JEL D12, D14, D91, J22, J31
DOI: 10.1257/aer.20121549

We examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions. We derive analytical expressions for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, nonseparability, progressive taxation, and asset accumulation. The model is estimated using panel data for hours, earnings, assets, and consumption. We focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks. Once family labor supply, assets, and taxes are properly accounted for there is little evidence of additional insurance. 

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Figure. After-tax Marshallian elasticities

Figure. After-tax Marshallian elasticities