FAMILY LIVING STANDARDS: New research on income dynamics and life-cycle inequality
27 May 2014
What made the recent ''great'' recession so damaging to living standards was an ''unholy alliance'' of adverse shocks to people''s savings and to their labour market earnings. The resulting fall in living standards was therefore more acute and longer-lived. These are among the findings of research by Professor Richard Blundell, published in the May 2014 issue of the Economic Journal.
His study of ''Income Dynamics and Life-Cycle Inequality'' explores the question of how individuals and families deal with adverse economic shocks For those with assets, the impact of short-run income shocks on their standard of living is, perhaps unsurprisingly, largely mitigated. More persistent shocks though, especially for families earlier on in their working life, result in lower levels of consumer expenditure and a longer-run decline in living standards.
But serious declines in consumption are often offset by increases in labour supply by other family members. For those with low levels of wealth, such labour supply responses in the family can be a particularly important ''coping'' mechanism, even when shocks are relatively short-lived.
Indeed, this research shows that once family labour supply, assets and government transfers are taken into account, the relationship between income shocks and family living standards is quite well understood. But it is important to note that these mechanisms work best in normal economic times.
Income Dynamics and Life-Cycle Inequality: Mechanisms and Controversies by Richard Blundell is published free in the Conference issue of the Economic Journal. The paper is based on his 2013 RES Presidential Lecture. A short interview about Richard''s research is available below.
Richard Blundell is at University College London and the Institute for Fiscal Studies.