If we plot saving against age in a cross section, the resulting profile will link
individuals born in different years. This may produce misleading evidence on age
effects if individuals born in different years are different in their resources or
preferences (Shorrocks, 1975). If we have access to several cross sections over time,
we can address this issue by using cohort analysis.
We define a cohort as a group of individuals born in the same calendar year.
By construction, cohort members age together (in this sense a cohort can be
considered as a synthetic individual). Note there is no within-cohort age variability
over any one observation year. Wider cohorts can be defined, including all
individuals born within a certain year band (5-year cohorts, for instance), but care
must be taken to define the age of each individual as the cohort mid-age.
Narrower cohorts can be defined, by selecting individuals who meet certain time-
invariant criteria (race, sometimes education and region).
When dealing with households, cohorts are normally defined on the basis of the
year of birth of the household head. This is correct if the head does not change over
time. Within couples the head is often the male, but this choice is of little
consequence if the age difference between spouses is not large. Howev er, the
presence of more than one adult within the household does raise the issue of
who takes the relevant consumption/saving decisions. There can be doubts on the
ability of the unitary model to interpret the data, particularly when both spouses
work. A simple example is provided in Browning (1995): given that women survive
longer, there will be disagreement within married couples on saving. The higher
the bargaining power of wives, the higher the household saving rate will be.
The case of multiple-adult (or composite) households poses further important
problems, discussed in Deaton and Paxson (2000). At the very least, household
income and consumption should be attributed to the various household members,
and not just to the head, before age profiles can be drawn. As we show in Table 2.1,
the presence of young adults living with their parents is extremely common in at
least two of the countries studied in this book (Italy and Japan). If the choice of
leaving home relates to wealth, income, or consumption, we face a problem of
TABLE 2.1 Proportion of Young Adults Living with Parent(s)
Country Male aged 25–29 Female aged 25–29 Male aged 30–34 Female aged 30–34
Germany 32 12 14 3.5
Italy 76 50 32 19.5
Japan 59 48 37 28
Netherlands 27 6 6 1.5
UK 21 9.5 6.5 4
USA 19 12 8 5.5
Source: OECD (2000).
40 Chapter 2 Household Saving: Concepts and Measurement