Consumption and Wage Humps in a Life-Cycle Model with Education
SAFE Working Paper No. 53
49 Pages Posted: 21 Jun 2014 Last revised: 17 Apr 2019
Date Written: February 24, 2015
The observed hump-shaped life-cycle pattern in individuals’ consumption cannot be explained by the classical consumption-savings model. The consensus explanation is that the hump is caused by constraints and unspanned risks. However, we explicitly show that the consumption hump naturally emerges in an unconstrained and risk-less setting with utility of both consumption and leisure and with educational decisions affecting future wages. 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: Suggested Citation