The Marriage the Merrier: Examining the Role of Family Labor Supply in Consumption Inequality

Abstract: Using data from the Panel Study of Income dynamics between 2009 and 2019, I first document that the disconnect between consumption and earnings inequality holds for married households but not single households. Married households seem to behave consistently with the Permanent Income Hypothesis, smoothing out their consumption based on their expected lifetime incomes. In contrast, single households' consumption is strongly correlated with their labor incomes, suggesting that their consumption behavior is based on their current income levels. I then quantitatively discuss the possible explanatory factors for these different types of behavior. Much of prior economic research on economic inequality has emphasized the role of financial markets, focusing on credit markets and borrowing. However, recent evidence suggests that tools within the household's boundaries are crucial for smoothing out consumption. Blundell et al. (2016) found strong evidence of smoothing in the case of permanent wage shocks, emphasizing the importance of family labor supply. Because the only systematic difference between the two samples is their respective marital status, I claim that the latter insurance mechanism plays a vital role in households' consumption smoothing process and not only the former.