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

SAFE Working Paper No. 53

49 Pages Posted: 21 Jun 2014 Last revised: 25 Feb 2015

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 observed hump-shaped life-cycle pattern in individuals' consumption cannot be explained by the classical consumption-savings model. We explicitly solve a model with utility of both consumption and leisure and with educational decisions affecting future wages. We show optimal consumption is hump shaped and determine the peak age. The hump results from consumption and leisure being substitutes and from the implicit price of leisure being decreasing over time; more leisure means less education, which lowers future wages, and the present value of foregone wages decreases with age. Consumption is hump shaped whether the wage is hump shaped or increasing over life.

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). SAFE Working Paper No. 53. Available at SSRN: https://ssrn.com/abstract=2456940

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

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

Claus Munk

Copenhagen Business School ( email )

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

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

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 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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