Michael Graber, University of Chicago

Income Risk, House Price Shocks and Consumption Inequality

Abstract

This paper uses household consumption measures derived from the Norwegian population register data on income and assets to examine the importance of house price shocks for the link between income and consumption inequality. We document a disjuncture between income and consumption inequality over the life-cycle, and develop the partial insurance approach to examine the extent to which this can be explained by changes in shocks to house prices and levels of wealth. We estimate semi-structural and reduced form models of the transmission of shocks to income and house prices into consumption. The geographical dispersion of local labour markets in Norway is used to examine how the marginal propensity to consume out of income varies by the nature of the shock (persistent vs transitory, local vs individual-specific, correlated with housing prices or not) and with the characteristics of the people (education, financial wealth, homeownership, and birth cohort). While taxes and transfers are found to play an important role in insuring shocks to labour income especially among the low educated, there is a strong transmission of house price shocks to consumption.

Michael Graber is a Postdoctoral Researcher at the University of Chicago's Economics Department. He is a labor economist with a research agenda that is mostly centered around a life-cycle perspective on earnings- and consumption dynamics.