HANDBOOK OF LABOR ECONOMICS, VOL 4B

Chapter 9

Earnings, Consumption and Life Cycle Choices^*

Costas Meghir^*, *Yale University, University College London, IFS and IZA

Luigi Pistaferri^**, ** Stanford University, NBER, CEPR and IZA

Abstract

We discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle. We start by analyzing the theoretical impact of income changes on consumption—highlighting the role of persistence, information, size and insurability of changes in economic resources. We next examine the empirical contributions, distinguishing between papers that use only income data and those that use both income and consumption data. The latter do this for two purposes. First, one can make explicit ...