dealing with consumer default bankruptcy vs garnishment abstract what are the positive and normative implications of eliminating bankruptcy protection for indebted individuals without bankruptcy protection creditors can collect on defaulted debt to the extent permitted by wage garnishment laws the elimination lowers the default premium on unsecured debt and permits low net worth individuals suffering bad earnings shocks to smooth consumption by borrowing there is a large increase in consumer debt financed essentially by super wealthy individuals a modest drop in capital per worker and a higher frequency of consumer default average welfare rises by 1 of consumption in perpetuity with about 90 of households favoring the change

learning your earning are labor income shocks really very persistent in this paper we examine the risk situation facing individuals in the labor market the current consensus in the literature is that the labor income process has a large random walk component we argue two points first the estimates of persistence from income data appear to be upward biased due to the omission of heterogeneity in income pro les across the population that would be implied for example by a human capital model with heterogeneity when we allow for dierences in pro les the estimated persistence falls from 0 99 to about 0 8 moreover the main evidence against pro le heterogeneity in the existing literature that the autocorrelations of income changes are small and typically negative is also replicated by the pro le heterogeneity model we estimate casting doubt on the previous interpretation of this evidence second we embed this process in a life cycle model to examine how it alters individuals consumption saving decision we assume that as seems plausible individuals do not know their pro les exactly at the beginning of life but learn in a bayesian way with successive income observations we nd that learning is very slow and aects consumption decision throughout the life cycle the model generates substantial rise in consumption inequality over the life cycle which matches empirical observations deaton and paxson 1994 moreover the shape of the age inequality pro le is non concave as in the data but unlike in a model with very persistent shocks finally the consumption pro les of college graduates are steeper than those of high school graduates in the model consistent with the data because they face a wider dispersion of and hence uncertainty about income growth rates overall this evidence indicates that income shocks may be signi cantly less persistent than what is currently assumed

subjective expectations and income processes in rural india this paper uses unique primary data on directly elicited individual subjective expectations to analyse and characterize the process that generates the income of poor rural indian households we validate and use responses to subjective expectations questions and a parametric assumption to fit a household specific probability distribution for future income combining computed moments from this distribution with data for actual current income we specify and estimate a dynamic model of household income we find that our households face a very persistent income process our paper is one of the first that uses subjective expectations data to model income processes

correlations of brothers earnings and intergenerational transmission correlations between parent and child earnings reflect intergenerational mobility and more broadly correlations between siblings earnings reflect shared community and family background these earnings relationships capture important aspects of relations in socioeconomic status more generally we estimate intergenerational transmission and sibling correlations of life cycle earnings jointly within a unified framework that nests previous models using data on the danish population of father first son second son triads we find that intergenerational effects account for on average 72 percent of sibling correlations this share is higher than all previous studies because we allow for heterogeneous intergenerational transmission between families sibling correlations exhibit a u shape over the working life consistent with differences in human capital investments between families

income dynamics and life cycle inequality mechanisms and controversies this study focuses on the transmission of inequality over the working life a model of constrained intertemporal choice is used to provide structure to the distributional dynamics of wages earnings income and consumption the mechanisms used to insure labour market shocks are examined in a partial insurance setting where the manner and scope for insurance depends on the access to credit the information available to consumers and the durability of income shocks drawing on recent research family labour supply the credit market and the tax system are all shown to play a key role these mechanisms vary in importance across different points of the life cycle and the business cycle 2014 the author s the economic journal published by john wiley sons ltd on behalf of royal economic society

does market incompleteness matter this paper argues that incompleteness of intertemporal financial markets has little effect on welfare prices or consumption in an economy with a single consumption good provided that traders are long lived and patient a riskless bond is traded shocks are transitory and there is no aggregate risk in an economy with aggregate risk a similar conclusion holds provided traders share the same crra utility function and the right assets are traded examples demonstrate that these conclusions need not hold if the wrong assets are traded or if the economy has multiple consumption goods

earnings instability and earnings inequality of males in the united states 1967 1991 although much research has focused on recent increases in annual earnings inequality in the united states the increases could have come from either of two sources the distribution of lifetime earnings could have become more unequal or the receipt of lifetime earnings could have become more unstable based on an analysis of the 1968 92 panel study of income dynamics we find that lifetime earnings inequality increased during the early 1980s and that earnings instability increased during the 1970s we also examine how these trends are related to changes in the distribution of wages and hours and the returns to education

valuing lost home production of dual earner couples using a life cycle model in which women divide their time between home and market work we establish a link between retirement wealth and the value of forgone home production we use data from the health and retirement study to estimate the model s parameters and adjust the growth rate of gdp to reflect reductions in non market output we find that the value of forgone home production is modest about 25 percent of women s measured earnings

equilibrium heterogeneous agent models as measurement tools some monte carlo evidence abstract this paper discusses a series of monte carlo experiments designed to evaluate the empirical properties of heterogeneous agent macroeconomic models in the presence of sampling variability the calibration procedure leads to the welfare analysis being conducted with the wrong parameters the ability of the calibrated model to correctly predict the long run welfare changes induced by a set of policy experiments is assessed the results show that for the policy reforms with sizable welfare effects i e more than 0 2 the model always predicts the right sign of the welfare effects however the welfare effects can be evaluated with the wrong sign when they are small and when the sample size is fairly limited quantitatively the maximum errors made in evaluating a policy change are very small for some reforms in the order of 0 02 percentage points but bigger for others in the order of 0 6 percentage points finally having access to better data in terms of larger samples does lead to substantial increases in the precision of the welfare effects estimates though the rate of convergence can be slow

identifying heterogeneous income profiles using covariances of income levels and future growth rates abstract this paper shows that a central implication of heterogeneous income profiles hip is that the covariance between the level of income and future income growth rates must become strongly positive from about age 40 covariances of income levels and future growth rates therefore have strong identifying power for hip we show that adding such moments to an estimation can reverse seemingly strong evidence of hip we show this both in a small sample monte carlo study and using psid data our results are robust to including a fixed effect correlated with the hip component

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

has consumption inequality mirrored income inequality we revisit to what extent the increase in income inequality since 1980 was mirrored by consumption inequality we do so by constructing an alternative measure of consumption expenditure using a demand system to correct for systematic measurement error in the consumer expenditure survey our estimation exploits the relative expenditure of high and low income households on luxuries versus necessities this double differencing corrects for measurement error that can vary over time by good and income we find consumption inequality tracked income inequality much more closely than estimated by direct responses on expenditures jel d31 d63 e21

how important are idiosyncratic shocks evidence from labor supply the notion that individuals face idiosyncratic labor market uncertainty is a common one government programs such as unemployment insurance and social security are motivated by such an idea economic theory ranging from labor supply to savings behavior to asset pricing often presupposes that such risks are important a number of papers however have questioned this orthodoxy sumru altug and robert a miller 1990 for instance are unable to reject a set of factor structure restrictions implied by complete markets john h cochrane 1991 and barbara j mace 1991 find evidence of consumption insurance although not against all types of risks robert m townsend 1994 documents evidence of risk sharing in indian villages michael p keane and kenneth i wolpin 1997 argue that 90 percent of the labor market uncertainty faced by a group of males is resolved by age 16 other studies have suggested the opposite papers by joseph g altonji et al 1991 orazio attanasio and steven j davis 1996 and attanasio and guglielmo weber 1992 as well as some evidence in cochrane 1991 and mace 1991 suggest that risk sharing is far from complete in particular for low frequency shocks angus deaton and christina paxson 1994 show that inequality in labor earnings total income and consumption increases with age they suggest that this is difficult to reconcile with standard models of complete consumption insurance in storesletten et al 2000 we ask similar questions using a general equilibrium life cycle model we conclude that increasing inequality with age consumption inequality in particular is difficult to explain in the absence of uninsured idiosyncratic shocks received throughout the working years we argue that between 40 percent and 50 percent of an individual s lifetime uncertainty remains unresolved prior to entering the workforce this paper further examines the implications of increasing inequality with age we begin by asking if a very different model one which features full risk sharing can account for the data the idea which deaton and paxson 1994 attribute to steven davis is that increasing income and consumption inequality can arise in a perfect insurance setting if i dispersion in labor productivity increases with age and ii preferences are nonseparable between leisure and consumption if this is true an efficient allocation may feature increasing consumption dispersion because higher productivity workers will supply relatively more labor and be compensated with more consumption we develop a specific model and find that for plausible parameter values this is exactly what happens what also happens however is that such an allocation features increasing inequality in hours worked using data from the panel study on income dynamics psid we show that inequality in hours worked is roughly constant across age this casts doubt on the full risksharing model and strengthens the argument in favor of uninsurable idiosyncratic risk the remainder of our paper provides a more general discussion of the evidence on inequality and age and how this suggests an important role for idiosyncratic labor market shocks

idiosyncratic risk aggregate risk and the welfare effects of social security we ask whether a pay as you go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk we show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components one reason is the convexity of the welfare gain in total risk the other reason is a direct risk interaction which amplifies the utility losses from consumption risk we proceed with a quantitative evaluation of social security s welfare effects we find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation even net of the welfare losses from crowding out about 60 of the welfare gains would be missing when simply summing up the isolated benefits

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

growth rate heterogeneity and the covariance structure of life cycle earnings using u s panel data on adult males i compare the profile heterogeneity model of earnings dynamics in which the earnings experience profile varies across individuals to a competing model in which earnings has a unit root the latter specification enjoys increasing popularity among researchers my analysis questions this favor suggesting the profile heterogeneity model provides a more consistent representation of the data i also provide new estimates of the variation in earnings growth rates previous evidence is from relatively unrepresentative samples individuals one standard deviation above the mean enjoy a 20 30 earnings advantage in just 10 years

the life cycle and the business cycle of wage risk cross country comparisons abstract we provide evidence on life cycle and business cycle fluctuations in the dispersion of household level wage innovations comparing the us the uk and germany first we find that household characteristics explain about 25 of the dispersion in wages within an age group in all three countries second the cross sectional variance of wages is almost linearly increasing in household age in all three countries but with increments being smaller in the european data third wage risk is procyclical in germany while it is countercyclical in the us and acyclical in the uk

sources of lifetime inequality is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime we answer this question within a model that features idiosyncratic shocks to human capital estimated directly from data as well as heterogeneity in ability to learn initial human capital and initial wealth we find that as of age 23 differences in initial conditions account for more of the variation in lifetime earnings lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime jel d31 d91 j24 j31 to what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the working lifetime among the individual differences established early in life which ones are the most important a convincing answer to these questions is of fundamental importance first and most simply an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions e g public education against those directed at shocks over the working lifetime e g unemployment insurance second a discussion of lifetime inequality cannot go too far before discussing which specific type of initial condition is the most critical for determining how one fares in life third a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics public finance and labor economics we view lifetime inequality through the lens of a risky human capital model agents differ in terms of three initial conditions initial human capital learning ability and financial wealth initial human capital can be viewed as controlling the intercept of an agent s mean earnings profile whereas learning ability acts to rotate

the surprising power of age dependent taxes this paper provides a new empirically driven application of the dynamic mirrleesian framework by studying a feasible and potentially powerful tax reform age dependent labour income taxation i show analytically how age dependence improves policy on both the intratemporal and intertemporal margins i use detailed numerical simulations calibrated with data from the u s panel study of income dynamics to generate robust policy implications age dependence 1 lowers marginal taxes on average and especially on high income young workers and 2 lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted finally i calculate and characterize the welfare gains from age dependence despite its simplicity age dependence generates a welfare gain equal to between 0 6 and 1 5 of aggregate annual consumption and it captures more than 60 of the gain from reform to the dynamic optimal policy the gains are due to substantial increases in both efficiency and equity when age dependence is restricted to be pareto improving the welfare gain is nearly as large

self insurance vs self financing a welfare analysis of the persistence of shocks abstract we study the welfare cost of market incompleteness in a generalized bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks market incompleteness in our framework has two dimensions first in the bewley tradition only a limited set of instruments for consumption smoothing is available second entrepreneurs capital rental is subject to collateral constraints as is well known it is harder to self insure against more persistent shocks and the welfare cost of missing consumption insurance increases with shock persistence on the other hand with collateral constraints an increase in shock persistence leads to better allocation of production factors through entrepreneurs self financing and the welfare cost of imperfect capital rental markets decreases with shock persistence the overall welfare cost of market incompleteness can be increasing decreasing or even non monotone in shock persistence depending on the relative strengths of its two components the cost of missing insurance and the cost of imperfect capital markets

does the labor income process contain a unit root evidence from individual specific time series employing econometric methods for univariate time series this paper investigates the empirical validity of assuming a unit root in indiv iduals labor income processes using a swedish register based longitudinal dataset which a llows us to follow a cohort of workers from 1968 to 2005 we are able to obtain distributi ons of median unbiased estimates of localto unity parameters the results indicate that earn ings for the representative worker are governed by a process where shocks to earnings have fairly high persistence but are both economically and statistically significantly differ ent from having permanent effects that is the largest autoregressive root is less than unity these results add to the studies that question the heavy use of unit root processes for earnings i n calibrations of life cycle models

taxation of human capital and wage inequality a cross country analysis wage inequality has been significantly higher in the united states than in continental european countries ceu since the 1970s moreover this inequality gap has further widened during this period as the us has experienced a large increase in wage inequality whereas the ceu has seen only modest changes this paper studies the role of labor income tax policies for understanding these facts we begin by documenting two new empirical facts that link these inequality differences to tax policies first we show that countries with more progressive labor income tax schedules have significantly lower before tax wage inequality at different points in time second progressivity is also negatively correlated with the rise in wage inequality during this period we then construct a life cycle model in which individuals decide each period whether to go to school work or be unemployed individuals can accumulate skills either in school or while working wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks progressive taxation compresses the after tax wage structure thereby distorting the incentives to accumulate human capital in turn reducing the cross sectional dispersion of before tax wages we find that these policies can account for half of the difference between the us and the ceu in overall wage inequality and 76 of the difference in inequality at the upper end log 90 50 differential when this economy experiences skill biased technological change progressivity also dampens the rise in wage dispersion over time the model explains 41 of the difference in the total rise in inequality and 58 of the difference at the upper end

consumption inequality and family labor supply 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 jel d12 d14 d91 j22 j31

heterogeneous income profiles and lifecycle bias in intergenerational mobility estimation using short snapshots of income in intergenerational mobility estimation causes lifecycle bias if the snapshots cannot mimic lifetime outcomes we use uniquely long series of swedish income data to show that this bias is large and to examine current strategies to reduce it we confirm that lifecycle bias is smallest when incomes are measured around midlife a central implication from a widely adopted generalization of the classical errors in variables model however the model cannot predict the ideal age of measurement or eliminate lifecycle bias at other ages we illustrate how extensions of this model can reduce the bias further

divorce risk wages and working wives a quantitative life cycle analysis of female labour force participation this article develops a quantitative life cycle model to study the increase in married women s labour force participation lfp we calibrate the model to match key life cycle statistics for the 1935 cohort and use it to assess the changed environment faced by the 1955 cohort we find that a higher divorce probability and changes in wage structure are each able to explain a large proportion of the lfp increase higher divorce risk increases lfp not because the latter contributes to higher marital assets or greater labour market experience however instead it is the result of conflicting spousal preferences towards the adjustment of marital consumption in the face of increased divorce risk the dramatic increase in the second half of the twentieth century in married women s labour force participation lfp has given rise to a large and growing literature that explores the roles of the multiple forces that led to this evolution some explanations have emphasised technological change in the household greenwood et al 2005 or in medical contraceptive technology goldin and katz 2002 albanesi and olivetti 2009a b knowles 2007 other explanations have emphasised changes in the wage

capital taxation quantitative explorations of the inverse euler equation economies with private information provide a rationale for capital taxation in this paper we ask what the welfare gains from following this prescription are we develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets we find that general equilibrium forces are important and greatly reduce the welfare gains once these effects are taken into account the gains are relatively small in our benchmark calibration these results do not imply that dynamic aspects of social insurance design are unimportant but they do suggest that capital taxation may play a modest role

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

life cycle effects of health risk abstract health status affects individuals labor supply asset accumulation and welfare through four main channels productivity medical expenditures time endowments and survival probabilities using a life cycle model calibrated to the u s for different education groups i evaluate the relative importance of each channel and quantify their interactions the productivity and time endowment channels dominate in importance and the risks implied by them contribute significantly to income inequality and precautionary savings health effects are larger for the non college than college educated and account to a large extent for the lower labor supply and higher reliance on government transfers of the non college group

earnings and consumption dynamics a nonlinear panel data framework we develop a new quantile based panel data framework to study the nature of income persistence and the transmission of income shocks to consumption log earnings are the sum of a general markovian persistent component and a transitory innovation the persistence of past shocks to earnings is allowed to vary according to the size and sign of the current shock consumption is modeled as an age dependent nonlinear function of assets unobservable tastes and the two earnings components we establish the nonparametric identification of the nonlinear earnings process and of the consumption policy rule exploiting the enhanced consumption and asset data in recent waves of the panel study of income dynamics we find that the earnings process features nonlinear persistence and conditional skewness we confirm these results using population register data from norway we then show that the impact of earnings shocks varies substantially across earnings histories and that this nonlinearity drives heterogeneous consumption responses the framework provides new empirical measures of partial insurance in which the transmission of income shocks to consumption varies systematically with assets the level of the shock and the history of past shocks

from the peaks to the valleys cross state evidence on income volatility over the business cycle abstract countercyclical variation in individuals idiosyncratic labor income risk could generate substantial welfare costs following past research we infer income volatility the variance of permanent income shocks a standard proxy for income risk from the rate at which cross sectional variances of income rise over the life cycle for a given cohort our novelty lies in exploiting cross state variation in state economic conditions or state sensitivity to national economic conditions we find that income volatility is higher in good state times than bad during good national times we find volatility is higher in states that are more sensitive to national conditions

the evolution of wages over the lifecycle insights from intergenerational connections this article uses intergenerational information to improve our understanding of lifecycle wage dynamics i present a simple statistical model that relates the wages of workers at different points in their lifecycle to the earnings of their parents i decompose cross sectional variance of wages into a permanent component related to parental background a permanent component unrelated to parental background and a transitory component data from the panel study of income dynamics psid suggests that intergenerational relationships are stronger when measured later in the lifecycle of the son this implies that the permanent parent related component is increasingly important for wage determination as workers grow older this is not consistent with wage evolution through persistent random shocks rather it is consistent with human capital models and learning models of wage evolution

on identifying permanent and transitory shocks in var models abstract a simple procedure to identify the groups of permanent and transitory shocks in a cointegrated var model is suggested and a method for inverting the cointegrated var is provided

human capital risk contract enforcement and the macroeconomy we use data from the survey of consumer finance and survey of income program participation to show that young households with children are under insured against the risk that an adult member of the household dies we develop a tractable macroeconomic model with human capital risk age dependent returns to human capital investment and endogenous borrowing constraints due to the limited pledgeability of human capital limited contract enforcement we show analytically that consistent with the life insurance data in equilibrium young households are borrowing constrained and under insured against human capital risk a calibrated version of the model can quantitatively account for the life cycle variation of life insurance holdings financial wealth earnings and consumption inequality observed in the us data our analysis implies that a reform that makes consumer bankruptcy more costly like the bankruptcy abuse prevention and consumer protection act of 2005 leads to a substantial increase in the volume of both credit and insurance

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

understanding the evolution of the us wage distribution a theoretical analysis in this paper we propose an analytically tractable overlapping generations model of human capital accumulation and study its implications for the evolution of the us wage distribution from 1970 to 2000 the key feature of the model and the only source of heterogeneity is that individuals differ in theirabilitytoaccumulatehumancapital therefore wageinequalityresultsonlyfromdifferencesin human capital accumulation we examine the response of this model to skill biased technical change sbtc theoretically we show that in response to sbtc the model generates behavior consistent with some prominent trends observed in the us data including i a rise in overall wage inequality both in the short run and long run ii an initial fall in the education premium followed by a strong recovery leading to a higher premium in the long run iii the fact that most of this fall and rise takes place among younger workers iv a rise in within group inequality v stagnation in median wage growth and a slowdown in aggregate labor productivity and vi a rise in consumption inequality that is much smaller than the rise in wage inequality these results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of sbtc and interpreting the transformation of the us labor markets since the 1970s jel e21 e24 j24 j31

earnings instability and tenure we study the effect of tenure on earnings instability in italy using two alternative estimation strategies first we use a descriptive measure of earnings instability and fixed effects regressions second we develop a formal model of earnings dynamics distinguishing permanent from transitory earnings and exploit variation of tenure and instability over time and across birth cohorts in estimation we use the two approaches also to evaluate earnings instability associated with temporary contracts short tenure contracts our results indicate that each year of tenure on the job reduces earnings instability on average by 11 workers on a temporary contract have an earnings instability up to 50 higher than workers on a permanent contract

information heterogeneity and market incompleteness information is market consistent if agents only use market prices to infer the underlying states of the economy this paper applies this concept to a stochastic growth model with incomplete markets and heterogeneous agents the economy with market consistent information can never replicate the full information equilibrium and there are substantial differences in impulse responses to aggregate productivity shocks these results are robust to the introduction of a noisy public signal and aggregate financial markets we argue that the principle of market consistent information should be applied to any model with incomplete markets

inferring labor income risk and partial insurance from economic choices this paper uses the information contained in the joint dynamics of individuals labor earnings and consumption choice decisions to quantify both the amount of income risk that individuals face and the extent to which they have access to informal insurance against this risk we accomplish this task by using indirect inference to estimate a structural consumption savings model in which individuals both learn about the nature of their income process and partly insure shocks via informal mechanisms in this framework we estimate i the degree of partial insurance ii the extent of systematic differences in income growth rates iii the precision with which individuals know their own income growth rates when they begin their working lives iv the persistence of typical labor income shocks v the tightness of borrowing constraints and vi the amount of measurement error in the data in implementing indirect inference we find that an auxiliary model that approximates the true structural equations of the model which are not estimable works very well with negligible small sample bias the main substantive findings are that income shocks are moderately persistent systematic differences in income growth rates are large individuals have substantial amounts of information about their income growth rates and about one half of income shocks are smoothed via partial insurance putting these findings together the amount of uninsurable lifetime income risk that individuals perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets

learning your comparative advantages we introduce an equilibrium labor market model where workers gradually learn about their unobserved production abilities while engaged in a productive activity occupation workers observe their output and extract information that allows them to make inferences about their unobserved aptitudes because workers are learning about themselves their output informs them not only about their productivity in their current occupation but about their likely productivity in other occupations as well as workers acquire more information they self select into the occupations in which they expect to perform best and their wages increase returns to experience here capture improved job selection by workers as they sort through occupations and learn

technological revolutions and the three great slumps a medium run analysis abstract the great recession the great depression and the japanese slump of the 1990s were all preceded by periods of major technological innovation which happened about 10 years before the start of the decline in economic activity we estimate a model with noisy news we find that beliefs about long run income adjust to permanent shifts in productivity with an important delay the estimation tells a common and simple story for the observed dynamics of productivity and consumption on a 20 to 25 year window our analysis highlights the advantages of a look at this data from the point of view of the medium run

humps and bumps in lifetime consumption in this article we argue that the life cycle model that allows demographics to affect household preferences and relaxes the assumption of certainty equivalence can generate hump shaped consumption profiles over age that are very similar to those observed in household level data sources and in particular match the differences in shape across different education groups liquidity constraints or myopia are not required to explain the empirical features of observed life cycle patterns

huggett economies with multiple stationary equilibria abstract i obtain a closed form solution to a huggett economy with constant absolute risk aversion cara utility when the vector of individual state variables follows a var 1 process with an arbitrary shock distribution the stationary equilibrium is unique if the income process is ar 1 but not necessarily so otherwise with gaussian shocks i provide general sufficient conditions for the existence of at least three equilibria when the income process is either arma 1 1 ar 2 or has a persistent transitory pt representation with negatively correlated shocks the possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous agent models as an illustration i provide an example in which the welfare implication of changing the income risk goes in opposite directions depending on the choice of equilibrium

the great moderation in micro labor earnings abstract between 1980 and the early 1990s the variability of labor earnings growth rates across the prime age working population fell significantly this decline and timing are consistent with other macro and micro observations about growth variability that are collectively referred to as the great moderation the variability of earnings growth is negatively correlated with age at any point in time and the u s working age population got older during this period because the baby boom was aging however the decrease in variability was roughly uniform across all age groups so population aging is not the source of the overall decline the variance of log changes also declined at multi year frequencies in such a way as to suggest that both permanent and transitory components of earnings shocks became more moderate a simple identification strategy for separating age and cohort effects shows a very intuitive pattern of permanent and transitory shocks over the life cycle and confirms that a shift over time in the stochastic process occurred even after controlling for age effects

consumption volatility liquidity constraints and household welfare we evaluate the impact of increased income uncertainty and financial liberalisation in the us on consumption volatility and household welfare we estimate euler equations and measure the volatility of unpredictable changes in consumption as the squared residuals we directly control for liquidity constraints using survey of consumer finances data on access to credit and document that despite the increase in household debt between 1983 and 2007 there was no decline in the proportion of liquidity constrained households consumption volatility increased significantly over this period especially for liquidity constrained households indicating substantial welfare losses

the distribution of wealth and fiscal policy in economies with finitely lived agents we study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth financial markets are incomplete exposing agents to both labor and capital income risk we show that the stationary wealth distribution is a pareto distribution in the right tail and that it is capital income risk rather than labor income that drives the properties of the right tail of the wealth distribution we also study analytically the dependence of the distribution of wealth of wealth inequality in particular on various fiscal policy instruments like capital income taxes and estate taxes and on different degrees of social mobility we show that capital income and estate taxes can significantly reduce wealth inequality as do institutions favoring social mobility finally we calibrate the economy to match the lorenz curve of the wealth distribution of the u s economy

consumption inequality and income uncertainty this paper places the debate over using consumption or income in studies of inequality growth in a formal intertemporal setting it highlights the importance of permanent and transitory income uncertainty in the evaluation of growth in consumption inequality we derive conditions under which the growth of variances and covariances of income and consumption can be used to separately identify the growth in the variance of permanent and transitory income shocks household data from britain for the period 1968 1992 are used to show a strong growth in transitory inequality toward the end of this period while younger cohorts are shown to face significantly higher levels of permanent inequality

consumption over the life cycle facts from consumer expenditure survey data this paper uses consumer expenditure survey data and a seminonparametric statistical model to estimate life cycle profiles of consumption controlling for demographics cohort and time effects we construct age profiles for total and nondurable consumption as well as expenditure patterns for consumer durables special emphasis is placed on the comparison of different approaches to control for changes in demo graphics over the life cycle we find significant humps over the life cycle for total nondurable and durable expenditures changes in household size account for roughly half of these humps bootstrap simulations suggest that our empirical estimates are tight in that standard errors are small

wage risk and employment risk over the life cycle we specify a structural life cycle model of consumption labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects the sources of risk are shocks to productivity job destruction the process of job arrival when employed and unemployed and match level heterogeneity our model allows for four main social insurance programmes in contrast to simpler models that attribute all income fluctuations to shocks our framework allows us to disentangle the effects of the shocks from the responses to these shocks estimates of productivity risk once we control for employment risk and for individual labour supply choices are substantially lower than estimates that attribute all wage variation to productivity risk increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving increases in employment risk have large effects on output and primarily through this channel affect welfare the welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides partial insurance against employment risk and no insurance against persistent shocks

consumption and labor supply with partial insurance an analytical framework we develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing closed form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption hours and wages we prove identification and demonstrate how labor supply data are informative about risk sharing the model estimated with us data over the period 1967 2006 implies that i 39 percent of permanent wage shocks pass through to consumption ii the share of wage risk insured increased until the early 1980s and iii preference heterogeneity is important in accounting for observed dispersion in consumption and hours jel e21 e23 e31 e52

bounded rationality lifecycle consumption and social security abstract this paper explores an overlapping generations model of bounded rationality in which consumers only foresee the future over a subset of their life span we focus in particular on whether the model can in general equilibrium produce a hump shaped lifecycle consumption profile with a peak that matches data for the average u s consumer for a simple four period model we show that an increasing income profile along with exogenously imposed retirement are sufficient to induce a hump with no other mechanism that can account for a hump besides bounded rationality the model best fits the salient features of consumption data with a planning horizon of 20 years which is well supported by the behavioral evidence found in surveys on retirement planning finally we show that the age of the consumption peak is robust to the introduction of social security mortality risk and another species of bounded rationality quasihyperbolic discounting moreover social security can be welfare improving with a short planning horizon we can calibrate the model to jointly explain the timing of the consumption hump and the optimality of the current social security system with quasihyperbolic discounting instead we can calibrate the model so the current social security system is optimal but we cannot also account for the timing of the consumption hump if we add quasihyperbolic discounting in addition to a short planning horizon the present bias has a negligible effect in equilibrium

modeling earnings dynamics in this paper we use indirect inference to estimate a joint model of earnings employment job changes wage rates and work hours over a career we use the model to address a number of important questions in labor economics including the source of the experience profile of wages the response of job changes to outside wage offers and the effects of seniority on job changes we also study the dynamic response of wage rates hours and earnings to various shocks and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime we find that human capital accounts for most of the growth of earnings over a career although job seniority and job mobility also play significant roles unemployment shocks have a large impact on earnings in the short run as well as a substantial long term effect that operates through the wage rate shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job specific error components of wages and hours

individual income incomplete information and aggregate consumption individual income is much more variable than aggregate per capita income i argue that aggregate information is therefore not very important for individual consumption decisions and study models of life cycle consumption in which individuals react optimally to their own income process but have incomplete or no information on economy wide variables since individual income is less persistent than aggregate income consumers will react too little to aggregate income variation aggregate consumption will be excessively smooth since aggregate information is slowly incorporated into consumption aggregate consumption will be autocorrelated and correlated with lagged income on the other hand the model has the same prediction for micro data as the standard permanent income model the second part of the paper provides empirical evidence on individual and aggregate income processes different models for individual income are fit to quarterly data from the survey of income and program participation making various adjustments for measurement error calibrating the consumption model using the estimated parameters for the income process yields predictions which qualitatively correspond to the empirical findings for aggregate consumption but do not match them well in magnitude

uncertainty persistence and heterogeneity a panel data perspective the purpose of this paper is to review newly developed identification and estimation tools that are relevant for the analysis of dynamic dependence structures of income risk i present an application to nonlinear permanent transitory models of household income using data from the panel study of income dynamics psid but the empirical approach is more generally applicable household income processes are of interest because the size of shocks the nature of their persistence and crosshousehold heterogeneity are all important to understand how income inequality varies with age and cohort and how it translates into consumption inequality i argue that going from an econometrics of autocovariances to an econometrics of flexible distributions is feasible and has the potential to reveal richer aspects of risk for example nonlinear persistence of unusual shocks jel c23 d31 d12

the dynamics of inequality the past forty years have seen a rapid rise in top income inequality in the united states while there is a large number of existing theories of the pareto tail of the long run income distributions almost none of these address the fast rise in top inequality observed in the data we show that standard theories which build on a random growth mechanism generate transition dynamics that are too slow relative to those observed in the data we then suggest two parsimonious deviations from the canonical model that can explain such changes scale dependence that may arise from changes in skill prices and type dependence that is the presence of some high growth types these deviations are consistent with theories in which the increase in top income inequality is driven by the rise of superstar entrepreneurs or managers

a schumpeterian model of top income inequality top income inequality rose sharply in the united states over the last 40 years but increased only slightly in france and japan why we explore a model in which heterogeneous entrepreneurs broadly

income risk macroeconomic and demographic change and economic inequality in japan abstract using an olg model with heterogeneous households we investigate the relationship among income risk macroeconomic and demographic changes and economic inequality between 1980 and 2000 in japan by decomposing the primary factors in earnings and consumption inequality into macroeconomic variables and the demographic variable we find that our model replicates the evolution of economic inequality in japan by performing counterfactual simulations we demonstrate that two factors changes in time varying macroeconomic factors and the unexpected decline in the total factor productivity growth rate played important roles in the increase in earnings and consumption inequality in the 1990s

consumption retirement and social security evaluating the efficiency of reform that encourages longer careers abstract this paper proposes and analyzes a social security reform in which individuals no longer face the oasi payroll tax after say age 54 or a career of 34 years and their subsequent earnings have no bearing on their benefits we first estimate parameters of a life cycle model our specification includes non separable preferences and possible disability it predicts a consumption expenditure change at retirement we use the magnitude of the expenditure change together with households retirement age decisions to identify key structural parameters the estimated magnitude of the change in consumption expenditure depends importantly on the treatment of consumption by adult children of the household simulations indicate that the reform could increase retirement ages one year or more equivalent variations could average more than 4000 per household and income tax revenues per household could increase by more than 14 000

the wealth distribution in bewley economies with capital income risk abstract we study the wealth distribution in bewley economies with idiosyncratic capital income risk we show analytically that under rather general conditions on the stochastic structure of the economy a unique ergodic distribution of wealth displays a fat tail

employer learning productivity and the earnings distribution evidence from performance measures two ubiquitous empirical regularities in pay distributions are that the variance of wages increases with experience and innovations in wage residuals have a large unpredictable component the leading explanations for these patterns are that over time either firms learn about worker productivity but productivity remains fixed or workers productivities themselves evolve heterogeneously in this paper we seek to disentangle these two models and place magnitudes on their relative importance we derive a dynamic model of learning and productivity that nests both models and allows them to coexist we estimate our model on a 20 year panel of pay and performance measures from a single large firm the baker gibbsholmstrom data incorporating performance measures yields two key innovations first the panel structure implies that we have repeat measures of correlates of productivity as opposed to the empirical evidence on employer learning which uses one fixed measure second we can separate productivity from pay whereas the previous literature on productivity evolution could not we find that both models are important in explaining the data however the predominant effect is that worker productivity evolves idiosyncratically over time implying firms must continuously learn about a moving target therefore while the majority of pay dispersion is driven by variation in individual productivity wages differ significantly from individual productivity at all experience levels due to imperfect information we believe this represents a significant reinterpretation of the empirical literature on employer learning

a test of the household income process using consumption and wealth data the evolution of household income can be explained almost equally well by rival models however rival models have very different implications for other household behaviours such as consumption i therefore test between two prominent models in the uk using panel data on consumption and wealth as well as income over 1991 2006 to operate the test i show that long lived income shocks transmit far less than one for one through to consumption and particularly so for younger households i then compare these estimates of transmission with estimates of households ability to smooth shocks captured by the data on wealth conditional on the suitability of the consumption model my estimates provide evidence against the restricted income process rip and in favour of an alternative heterogeneous income process hip this finding also explains why cross sectional consumption inequality grew slowly over the period even though the variance of long lived shocks was high finally i conclude that it is important to consider mean reversion of shocks when constructing life cycle consumption models

information shocks and precautionary saving abstract skinner s 1988 risky income life cycle consumption and precautionary savings journal of monetary economics 22 237 255 second order approximation to the consumption function under crra utility is generalized to accommodate any structure of uninsurable income risk to second order a future income shock will induce precautionary saving in the present that depends on the variance of the expectation of the income shock at each intervening period however the expected rate of consumption growth depends only on the currently perceived variance of the expected present value of future income in a finite horizon model precautionary saving produces a hump shaped lifecycle profile of mean consumption primarily because the variance of future income decreases with age but the lifecycle dynamics of total wealth also affect the shape of the profile for a markov income process with autocorrelations on the order of 0 9 or less the second order approximation performs surprisingly well for common parameter choices from the literature but it does poorly as the autocorrelation approaches 1

earnings dynamics and inequality among canadian men 1976 1992 evidence from longitudinal income tax records using an extraordinary database drawn from longitudinal income tax records we decompose canada s growth in earnings inequality into its persistent and transitory components we find that the growth in earnings inequality reflects both an increase in long run inequality and an increase in earnings instability the canadian data strongly reject several restrictions commonly imposed in the u s literature and they also suggest that imposing these evidently false restrictions may lead to distorted inferences about earnings dynamics and inequality trends

are college graduates more responsive to distant labor market opportunities abstract are highly educated workers better at locating in areas with high labor demand to answer this question i use three decades of u s census data to estimate a mcfadden style model of residential location choice i test for education differentials in the likelihood that young workers reside in states experiencing positive labor demand shocks at the time these workers entered the labor market i find effects of changes in state labor demand on college graduate location choice that are several times greater than for high school graduates nevertheless medium run wage effects of entry labor market conditions for college graduates equal or exceed those of less educated workers

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

directed attention and nonparametric learning abstract this paper examines the implications of learning for the effects of ambiguity aversion the key result is that since agents naturally choose to learn about the sources of uncertainty that reduce utility the most information acquisition attenuates the most severe effects of ambiguity aversion the specific setting we study is the canonical consumption savings problem agents endogenously learn most about income dynamics at the very lowest frequencies while ambiguity aversion typically implies in this setting excessive extrapolation of income shocks that effect is eliminated here furthermore deviations of consumption from the full information benchmark are largest at high frequencies so the model naturally generates overreaction of consumption to predictable short run income variation

the surprisingly low importance of income uncertainty for precaution abstract while it is common to use income uncertainty to explain household saving decisions there is much disagreement about the importance of precautionary saving this paper suggests that income uncertainty is not an important motive for saving although households do have other precautionary reasons to save using a question from the survey of consumer finances that asks how much households want for precautionary purposes this paper shows that expressed household preferences and liquid savings are much lower than predicted by standard modeling assumptions households rarely list unemployment as a reason to save perceived income uncertainty does not affect liquid savings or precautionary preferences neither does being in an occupation with higher income volatility instead households seem very concerned with expenditure shocks

nonlinear household earnings dynamics self insurance and welfare earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents this holds for individual pre tax and household post tax earnings and across administrative social security administration and survey panel study of income dynamics data we study the implications of two processes for household post tax earnings in a standard life cycle model a canonical earnings process that includes a persistent and a transitory shock and a rich earnings dynamics process that allows for age dependence of moments non normality and nonlinearity in previous earnings and age allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross sectional consumption inequality over the life cycle and of the individual level degree of consumption insurance against persistent earnings shocks richer earnings dynamics also imply lower welfare costs of earnings risk but as the canonical earnings process do not generate enough concentration at the upper tail of the wealth distribution

wage risk and the value of job mobility in early employment careers this paper shows that job mobility is a valuable channel that employed workers use to mitigate bad labor market shocks i estimate a model of wage dynamics jointly with a dynamic model of employmen

the impact of investment behaviour for individual welfare the industrialized world has experienced a demographic shift that is straining public pension systems employer sponsored pension plans change from defined benefit to defined contribution more emphasis is put on individually managed retirement funds one concern with this movement is the potential negative effect on individual welfare if households investment behaviour is suboptimal using micro level us data we compare the optimal utility computed using a lifecycle model with the actual utility as reflected in empirical asset allocation choices average estimated welfare costs are below 3 of households endowment assets and human capital yet specific population groups experience higher welfare costs

human capital risk in life cycle economies i study the effect of market incompleteness on the aggregate economy in a model where agents face idiosyncratic uninsurable human capital investment risk the environment is a general equilibrium lifecycle model with a version of a ben porath 1967 human capital accumulation technology modified to incorporate risk a cara normal specification keeps endogenous decisions independent of individual shock realizations i study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital in the case of career risk however only the mean return is increasing in the decision to invest in human capital with career risk only stationary equilibria resemble those studied by aiyagari 1994 and one concludes that the impact of uninsurable idiosyncratic risk is relatively small with a significant amount of specialization risk however stationary equilibria are severely distorted relative to a complete markets benchmark one aspect of this distortion is that human capital is only about 57 percent as large as its complete markets counterpart this suggests that the two types of risk have very different and quantitatively significant general equilibrium implications keywords human capital risk life cycle incom

heterogeneous life cycle profiles income risk and consumption inequality was the increase in income inequality in the us due to permanent shocks or merely to an increase in the variance of transitory shocks the implications for consumption and welfare depend crucially on the answer to this question we use consumer expenditure survey cex repeated cross section data on consumption and income to decompose idiosyncratic changes in income into predictable life cycle changes transitory and permanent shocks and estimate the contribution of each to total inequality our model fits the joint evolution of consumption and income inequality well and delivers two main results first we find that permanent changes in income explain all of the increase in inequality in the 1980s and 1990s second we reconcile this finding with the fact that consumption inequality did not increase much over this period our results support the view that many permanent changes in income are predictable for consumers even if they look unpredictable to the econometrician consistent with models of heterogeneous income profiles

income variance dynamics and heterogeneity recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance in this paper the assumption of i i d income innovations used in previous empirical studies is removed and the focus of the analysis is placed on models for the conditional variance of income shocks which is related to the measure of risk emphasized by the theory we first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components we allow for education and time specific differences in the stochastic process for earnings and for measurement error the conditional variance of the income shocks is modelled as a parsimonious arch process with both observable and unobserved heterogeneity the empirical analysis is conducted on data drawn from the 1967 1992 panel study of income dynamics we find strong evidence of sizeable arch effects as well as evidence of unobserved heterogeneity in the variances

investment and abandonment behavior of rural households an empirical investigation this article uses models of irreversible investment under uncertainty to examine the investment and abandonment behavior of poor rural households it considers the decision of ugandan coffee farming households to invest in or abandon coffee trees the observed levels of investment and abandonment are found to be consistent with models of investment that allow for irreversibility uncertainty fixed costs and liquidity constraints the findings highlight the importance of addressing volatility irreversibility fixed costs and liquidity constraints in order to increase households responsiveness to changes in the fundamentals and to enable households to recover from shocks to their capital stock

emerging market business cycles learning about the trend abstract emerging market business cycles feature a higher variability of consumption relative to output and a strongly countercyclical trade balance an equilibrium business cycle model in which agents learn to distinguish between the permanent and transitory components of total factor productivity shocks using the kalman filter accounts for these features calibrated to mexico the model accounts for the behavior of consumption and the trade balance for a wide range of variability and persistence of permanent shocks relative to transitory shocks estimation for mexico and canada suggests more severe informational frictions in emerging markets than in developed economies

can consumers distinguish persistent from transitory income shocks we study whether households can distinguish persistent from transitory income shocks and the implications for consumption saving behavior we construct a novel consumption saving model where the household must infer the persistent component of its income process from actual income realizations together with an additional noisy private signal we first show that the degree of imperfect information has important consequences for the interpretation of transmission parameters to persistent and transitory income shocks a large transitory transmission parameter can e g be estimated despite of a low marginal propensity to consume because the short run covariance between income growth and consumption growth increases when households cannot distinguish persistent from transitory income shocks we further show that the householdsi degree of knowledge can be identified from panel data on income and consumption finally we estimate a high degree of knowledge in the panel study of income dynamics