Consumption and wage humps in a life-cycle model with education

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

No 53, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

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.

Keywords: education; leisure; consumption hump; wage hump (search for similar items in EconPapers)
JEL-codes: D11 D14 D91 I21 J24 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-edu and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:53

DOI: 10.2139/ssrn.2456940

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