Transmission of Income Variations to Consumption Variations: The Role of the Firm

Abstract

We use matched employer-employee data to study the role of the firm in the transmission of income growth into consumption growth. We find that growth in income relative to the firm average (the within-firm component) translates significantly less into consumption than growth in firm average income (the between-firm component). These findings are explained by lower persistence of the within-firm component of income, better self-insurance for workers more exposed to variations in income growth from the within-firm component, and peer effects in the workplace. Quantitatively, income persistence provides 43% of the explanatory power, self-insurance provides 35%, and peer effects provide 22%.

Keywords: income inequality, consumption transmission, firm, permanent income, self-insurance, peer effect

JEL Classification: D31, E21, G51