Labor and consumption across the lifecycle

Abstract

We propose new measures to summarize and compare age profiles of consumption and labor income. One measure is the lifetime support ratio or the ratio of effective lifetime labor to effective lifetime consumption. Two other measures measure the timing of work and consumption over the lifecycle. Using a highly stylized model we show how changes in these features of the lifecycle influence the standard of living that can be achieved. To illustrate the value of these measures we consider two practical applications. In the first we analyze the effect of increasing life expectancy on lifetime effective labor and consumption. We show that in longer life is leading to greater lifetime consumption but little response in lifetime labor supply. The exception to this generalization is in low income, high mortality countries where the gains in life expectancy are occurring at the working ages as well as the non-working ages. In the second application we consider whether the lifetime support ratio and the timing of consumption relative to labor income are influenced most by variation in life cycle patterns of work or lifecycle patterns of consumption. The answer depends on the level of development. In upper-middle income countries and high-income countries both are important. In these countries, then, effective policy should address both sides of the lifecycle – producing and consuming. In lower-income countries, however, only the age patterns of labor income appear to matter. Policies related to labor markets and labor force behavior appear to be critical under these circumstances.