Wage shocks and consumption variability in Mexico during the 1990s

This paper presents evidence on the relationship between shocks to relative male wages, and changes in household consumption in Mexico during the 1990s decade, which is a period characterized by high volatility. Apart from performing analysis of this type for Mexico for the first time, the paper has mainly two contributions. The first is the use of alternative data sources to construct instrumental variables for wages. The second is to examine differences across four consumption categories: non-durable goods, durable goods, education and health. Our results for non-durable goods consumption reject the hypothesis that Mexican households are able to insure idiosyncratic risk. For the comparisons across consumption categories, the conclusion is that households in Mexico tend to react to temporary shocks by contracting the consumption of goods that represents longer run investment in human capital, which makes them more vulnerable in the future

IRAs and household saving revisited: some new evidence

The effectiveness of tax-favored savings accounts in raising national savings depends crucially upon the willingness of households to reduce consumption in order to finance contributions to these accounts. The debate over the tax deductibility of IRA's has centered on whether IRA contributions represented new savings or reshuffled assets. We devise a test to distinguish between these two hypotheses where we compare the behavior of households which just opened an IRA account with that of households which already had an IRA account. Our test accounts for any unobservable heterogeneity across the two groups. We find evidence that supports the view that households financed their IRA contributions primarily through reductions in their stocks of other assets. Our results indicate that less than 20% of IRA contributions represented addition to national savings

Pension wealth and household saving: evidence from pension reforms in the UK

Using three major UK pension reforms as natural experiments we investigate the relationship between pension saving and discretionary private savings. Unlike most differences-in-differences approaches which rely on average differences between the control and the treatment group, we use economic theory to model the response of each individual household. The model permits us to use both time-series and cross-sectional variation in a consistent way to identify the behavioural response. The study is based on data from the Family Expenditure Survey. A measure of pension wealth is not observed, but we estimate it by applying the rules of the pension system to observed individual characteristics. The changes in pension wealth as a result of the reforms are substantial. The empirical analysis suggests that the earnings-related tier of the pension scheme has a negative impact on private savings with substitution elasticities approaching –1.0. The impact of the flat-rate tier of the scheme is found not to be significantly different from zero

Is consumption growth consistent with intertemporal optimization? evidence from the consumer expenditure survey

In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading

Relative wage movements and the distribution of consumption

We analyze how relative wage movements across birth cohorts and education groups during the 1980s affected the distribution of household consumption. The analysis integrates the labor economics literature on time variation in the wage structure with the consumption insurance literature. In contrast to previous tests of consumption insurance, we examine the impact of systematic, publicly observable shifts in the hourly wage structure. To circumvent the extreme scarcity of longitudinal data with high quality information on both consumption and labor market outcomes, we draw upon the best available cross-sectional data sources to construct synthetic panel data on consumption, labor supply and wages. We find that low-frequency movements in the cohort-education structure of pre-tax hourly wages drove large changes in the distribution of household consumption. The results constitute a spectacular failure of the consumption insurance hypothesis, and one that is not explained by existing theories of informationally constrained optimal consumption allocations. We also develop a procedure for assessing the welfare consequences of deviations from full consumption insurance and, in particular, from the failure to insulate the consumption distribution from relative wage shifts across cohort-education groups. For a coefficient of relative risk aversion equal to two, fully insulating households from group-specific endowment variation would raise welfare by an amount equivalent to a uniform 2.7% consumption increase

Differential mortality and wealth accumulation

The issue of asset accumulation and decumulation is central to the life cycle theory of consumer behavior and to many policy questions. One of the main implications of the life cycle model is that assets are decumulated in the last part of life. Most empirical studies in this area use cross-sectional data of estimate mean or median wealth-age profiles. The use of cross-sections to estimate the age profile of assets is full of pitfalls. For example, if wealth and mortality are related, in that poorer individuals die younger, one overestimates the last part of the wealth-age profile when using cross-sectional data because means (or other measures of location) are taken over a population which becomes 'richer' as it ages. This paper examines the effect of differential mortality on cross-sectional estimates of wealth-age profiles. Our approach is to quantify the dependence of mortality rates on wealth and use these estimates to 'correct' wealth-age profiles for sample selection due to differential mortality. We estimate mortality rates as a function of wealth and age for a sample of married couples drawn from the Survey of Income and Program Participation (SIPP). Our results show that accounting for differential mortality produces wealth profiles with significantly more dissaving among the elderly

Differential mortality in the UK

In this paper we use the two waves of the British Retirement Survey (1988/89 and 1994) to quantify the relationship between socio-economic status and health outcomes. We find that, even after conditioning on the initial health status, wealth rankings are important determinants of mortality and the evolution of the health indicator in the survey. For men aged 65 moving from the 40th percentile to the 60th percentile in the wealth distribution increases the probability of survival by between 2.4 and 3.4 percentage points depending on the measure of wealth used. A slightly smaller effect is found for women of between 1.5 and 1.9 percentage points. In the process of estimating these effects we control for non-random attrition from our sample

Stochastic components of individual consumption: a time series analysis of grouped data

In this paper we propose a method to characterize the time series properties of individual consumption, income and interest rates using micro data, as studies in labour economics have characterized the time series properties of hours and earnings. Our approach, however, does not remove aggregate shocks. Having estimated the parameters of a flexible multivariate MA representation we relate the coefficients of our statistical model to structural parameters of theoretical models of consumption behaviour. Our approach offers a unifying framework that encompasses the Euler equation approach to the study of consumption and the studies that relate innovations to income to innovations to consumption, such as those that have found the so-called excess smoothness of consumption. Using a long time series of cross sections to construct synthetic panel data for the UK, we estimate our model and find that the restriction of Euler equations are typically not rejected, while the data show ‘excess smoothness’

Intertemporal consumption choices, transaction costs and limited participation to financial markets: reconciling data and theory

This paper builds a unifying framework that, within the theory of intertemporal consumption choices, brings together the limited participation -based explanation of the poor empirical performance of the C-CAPM and the transaction costs-based explanation of incomplete portfolios. Using the implications of the consumption model and observed household consumption and portfolio choices, we identify the preference parameters of interest and a lower bound for the costs rationalizing non-participation in financial markets, in the presence of unobserved heterogeneity in tastes for consumption and portfolio allocation. Using the US Consumer Expenditure Survey and assuming isoelastic preferences, we estimate the coefficient of relative risk aversion at 1.7 and a cost bound of 0.4 percent of non-durable consumption. Our estimate of the preference parameter is theoretically plausible and the bound sufficiently small to be likely to be exceeded by the actual total (observable and unobservable) costs of participating to financial markets

Peace and goodwill? Using an experimental game to analyse Paz y Desarrollo

Several decades of conflict, rebellion and unrest severely weakened civil society in parts of Colombia. Paz y Desarrollo is the umbrella term used to describe the set of locally-led initiatives that aim at addressing this problem through initiatives to promote sustainable economic development and community cohesion and action. This project analyses the findings from a series of "public goods" games that were conducted in the spring and winter of 2006 in 103 municipalities in rural and urban Colombia with predominantly poor participants. These municipalities included both those with and without Paz y Desarrollo in place, and within those municipalities where it was ("treatment" municipalities), both individuals who are participants in the programme and those who are not. The municipalities where PYD is not in place ("control" municipalities) were surveyed as part of the evaluation of another programme - Familias en Accion (FEA), and this project also analyses the impact of this programme on game-play. The game is structured as a typical free-rider problem with the act of contributing to the "public good" (a collective money pot) being always dominated by non-contribution. We interpret contribution as an act consistent with a high degree of social capital. We find weak evidence that the programme acts at the group level: game sessions involving programme participants have higher levels of contribution than those not involving participants. In addition, there is some evidence that intensity of the programme matters: the more participants, the larger the impact. However, there is no evidence that the programme impacts at the individual level with participants no more likely to contribute than non-participants in treatment areas