Why Do Households Save and Work?

Margherita Borella, Mariacristina De Nardi, Fang Yang and Johanna Torres Chain

No 20323, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper develops and estimates a dynamic life-cycle model to quantify why households save and work. The model incorporates multiple sources of risk—health, marital status, wages, medical expenses, and mortality—as well as endogenous labor supply and human capital accumulation, retirement, and bequest motives at the death of the first and last household member. We estimate it using PSID and HRS data for the 1941–1945 cohort via the Method of Simulated Moments. Eliminating bequest motives reduces aggregate wealth by 23.8% and labor earnings by 1.2%; removing medical expenses lowers them by 13.1% and 0.7%. Wage risk is crucial for early-life saving: its removal reduces wealth by 10.4% but raises earnings by 2.3%. Eliminating marriage and divorce dynamics leads couples—numerous and wealthier—to save and work slightly less, and singles—fewer and poorer—to save and work considerably more. These effects largely offset in the aggregate. Removing all saving motives beyond retirement needs and lifespan uncertainty lowers wealth by 56.9% and earnings by 2.7%. These findings show that capturing multiple risks and behavioral margins jointly is essential to understanding household saving and labor supply.

Keywords: Savings; Labor supply; Bequests; Medical expenses; Wage risk (search for similar items in EconPapers)
JEL-codes: E21 H31 (search for similar items in EconPapers)
Date: 2025-06
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