Econometrica: May, 1985, Volume 53, Issue 3
A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle
Angus Deaton, Margaret Irish, Martin Browning
The paper presents a general theoretical framework for the analysis of integrated life-cycle models of consumption and family labor supply under uncertainty. Profit functions are used to represent intertemporally additive preferences and to yield convenient characterizations of "constant marginal utility of wealth" or "Frisch" demand functions. Conditions on preferences derived that allow additive fixed-effect specifications for the Frisch demands. Data from the British Family Expenditure Surveys from 1970-77 are used to derive panel-like information on male labor supply and consumption for several age cohorts over time. These data reproduce standard life-cycle patterns of hours and wages, but more detailed analysis shows that the theory is incapable of offering a satisfactory common explanation of the behavior of hours and wages over both the business cycle and the life cycle. Similarly, although the theory can explain the life-cycle behavior of hours and consumption separately, the same model cannot explain both, essentially because of a failure in symmetry.