Consumption and Wage Humps in a Life-cycle Model with Education

Holger Kraft, Claus Munk, Frank Thomas Seifried, Mogens Steffensen

Research output: Working paperResearch

Abstract

The observed hump-shaped life-cycle pattern in individuals' consumption cannot be explained by the classical consumption-savings model. We explicitly solve a model with utility of both consumption and leisure and with educational decisions affecting future wages. We show optimal consumption is hump shaped and determine the peak age. The hump results from consumption and leisure being substitutes and from the implicit price of leisure being decreasing over time; more leisure means less education, which lowers future wages, and the present value of foregone wages decreases with age. Consumption is hump shaped whether the wage is hump shaped or increasing over life.
Original languageEnglish
Place of PublicationFrankfurt am Main
PublisherJohann Wolfgang Goethe-Universität
Number of pages46
Publication statusPublished - 2014
SeriesSAFE Working Paper
Number53

Cite this

Kraft, H., Munk, C., Seifried, F. T., & Steffensen, M. (2014). Consumption and Wage Humps in a Life-cycle Model with Education. Johann Wolfgang Goethe-Universität. SAFE Working Paper, No. 53 http://hdl.handle.net/10419/97843