Deconstructing Lifecycle Expenditure
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Abstract
In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar “hump” shaped lifecycle profile of nondurable expenditures. The second is that cross-household consumption inequality increases steadily throughout the life cycle. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find that three categories account for nearly the entire decline in mean expenditure post-middle age: food, transportation, and clothing/personal care. All other nondurable categories we study, including housing services, utilities, entertainment, domestic services, charitable giving, gambling, etc., show no decline over the life cycle. Similarly, nearly all of the increase in cross-sectional inequality is driven by these same three categories. Excluding food, clothing, and transportation from our measure of non durable expenditures reduces the increase in consumption inequality by a factor of 8, and removes nearly all of the increase post middle age. We provide evidence that the categories driving life cycle consumption are either inputs into market work (clothing and transportation) or are amenable to home production (food). Changes in the opportunity cost of time will cause movements in expenditure on such goods even if there is no change to lifetime resources. The patterns documented in the paper suggest that prior inferences from consumption data regarding the extent of uninsurable risk faced by households are sensitive to the inclusion of work related expenses and the home production of food. The disaggregated consumption data also pose a challenge to models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment, to explain the lifecycle profile of expenditures.
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Conference Paper