Understanding Family Income and Consumption Dynamics in the U.S.

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This project examines a large and scientifically valuable data set to develop new measures of how household income and consumption vary over years. The principal investigator and his team will examine data from the Panel Study of Income Dynamics (PSID), a long term study that has gathered data on a sample of U.S. families over several generations since 1968. He will compare households formed by the daughters of the original participants with households formed by sons, to determine whether or not these two groups differ in the dynamic patterns of earnings and income. This is important research, because these patterns are important for many research questions in macroeconomics and labor economics. Measuring how American families have experienced changes in earnings and income is important for understanding how income shocks like unemployment will affect aggregate consumption. These measurements are also used by many experts in government to evaluate how government policies can affect the overall growth and competitiveness of the U.S. economy.The principal investigator will combine PSID data with administrative data records to test possible explanations for observed differences between the two sets of households. Standard measures of consumption insurance obtained using PSID data imply excess insurance of permanent income shocks relative to the predictions of a standard incomplete markets model. Preliminary results suggest that once these measures are made conditional on the income dynamics of each group, the degree of insurance in each subsample is consistent with the predictions of the workhorse model. This has important implications for work that combines the two samples to get aggregate measures of the amount of insurance available to U.S. households. The project therefore contributes to labor economics and macroeconomics and may uncover the need for new and better ways to measure income and earning dynamics at the household level.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.