Consumption and Wage Humps in a Life-Cycle Model with Education

Posted: 11 Jun 2014 Last revised: 2 Oct 2017

See all articles by Holger Kraft

Holger Kraft

Goethe University Frankfurt

Claus Munk

Copenhagen Business School

Frank Thomas Seifried

University of Trier

Mogens Steffensen

University of Copenhagen

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2015

Abstract

The empirically observed hump-shaped pattern in individuals' consumption over their life cycle cannot be explained by the classical consumption-savings model. We explicitly solve an extended model with utility depending on both consumption and leisure and with endogenous educational decisions affecting future wages. We show that optimal consumption has the observed hump shape, and we pin down the peak age. The hump results from consumption and leisure being substitutes and from the endogenously determined implicit price of leisure being decreasing over time; more leisure means less education, which negatively affects all future wages, and the present value of foregone wages decreases with age. In contrast to earlier related work, the presence of the consumption hump does not require the wage rate to be hump shaped, but also occurs when the wage rate is increasing over life as found in empirical studies.

Keywords: Education, leisure, consumption hump, wage hump

JEL Classification: D11, D14, D91, I21, J24

Suggested Citation

Kraft, Holger and Munk, Claus and Seifried, Frank Thomas and Steffensen, Mogens, Consumption and Wage Humps in a Life-Cycle Model with Education (February 24, 2015). Available at SSRN: https://ssrn.com/abstract=2448191

Holger Kraft

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universit├Ątsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

Mogens Steffensen

University of Copenhagen ( email )

Universitetsparken 5
DK-2100 Copenhagen
Denmark

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