Deconstructing Lifecycle Expenditure

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 lifecycle. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual consumption sub-components. We provide evidence that the categories driving lifecycle consumption are either inputs into market work (clothing and transportation) or are amenable to home production (food). Using a quantitative model, we document that the disaggregated lifecycle consumption profiles imply a level of uninsurable permanent income risk that is similar to that implied by wage data and substantially lower than that implied by a model using only a composite consumption good. ∗We thank Jesse Shapiro for early conversations which encouraged us to write this paper, as well as Daron Acemoglu, Orazio Attanasio, Richard Blundell, Eric French, Fatih Guevenen, Loukas Karabarbounis, Emi Nakamura, Fabrizio Perri, Ivan Werning, and Randy Wright for detailed comments. We are particularly grateful to Greg Kaplan for sharing his PSID data. We also thank seminar participants at the University of Rochester, the NBER Macro Perspectives Summer Institute Session, the Institute for Fiscal Studies, the Federal Reserve Board of Governors, Wisconsin, Harvard, Yale, MIT, Chicago, CREI, Stanford, Berkeley, Columbia, NYU, Houston, UCLA, MRRC, SUNY Albany, the 2008 NBER EFG summer program meeting, the NBER Time and Space conference, and the PIER/IGIER conference on inequality in macroeconomics. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Michigan Retirement Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA or any agency of the Federal Government. We thank Byoung Hoon Seok and Dan Ringo for excellent research assistance.