1 Consumption and Production Profiles Andrew Mason Sang-Hyop Lee Maliki January 14, 2005 NTA meeting at Berkeley

2 Objectives Identify methodological problems associated with estimating age profiles Explain how profiles vary with development, demography, and institutions

3 Two Approaches – Indirect Dependency ratios Fair and Dominguez – Direct Support ratio: Cutler et al

4 Advantages of Direct Estimates of Age Profiles Child and old-age dependency vary with development, institutions, tastes, etc. First step to exploring how societies are reallocating resources across the lifecycle Essential to understanding the macroeconomic effects of aging

5 Production Profiles Y=N*(L/N)*(Y/L) Entry and departure determine the shape Effect of aging on earnings at older ages is not clear because of earlier retirement For some countries, institutional factors are important

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10 Observations Differences among countries are not very large, but – Earnings at young ages more important in low income countries: age structure and labor force participation rates – Aging has a muted effect on earnings at older ages because of earlier retirement – Japan is very distinctive (seniority wage system)

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12 Methodological Issues Incorporating entrepreneurial income: some countries have a large informal sector Seniority based wage: should be spread over the working life? (funded vs. unfunded) Using FIES vs. LFS

13 Consumption Profiles Difficulties in estimating individual profiles Importance of considering both public and private consumption Differences across countries

14 Methodological Issues (Private) – Engel’s Method: Child consumption should not be dependent upon demographic composition. Probably upward biased estimate of child consumption – Rothbarth Method: Useful for young children, but not for teens or adults Maybe downward biased. – Both models assume that adults in the household have same preference irrespective of children

15 Cost of Children* Method Notes Engel114%144%152% Rothbarth<022%64%Adult clothing Rothbarth<0 38%Adult food Ray’s94%96%88%Several goods * Source: Maliki (2004) Reference adults: 30-34

16 Evaluation Need an alternative method which is theoretically and empirically sound. - “Split method” has an empirical advantage - Assignable goods are important Can the split method be justified by any consumer theory? What are the rule for non-assignable goods?

17 Theory for Split Method: Collective Bargaining Model Advantage over Engel’s and Rothbarth: the main result does not depend on household utility function. However, whether we can recover the income sharing rule is the question: Bourguignon (1999, J Popul Econ) provides a clue

18 Collective Bargaining Method 3 people 3 goods: Suppose we have one assignable good (x3) to a child, one assignable good (x1) to adult A, and one non-assignable good (x2). The cost of children is We can directly assign assignable good to children under this model.

19 Separate Estimates of Private Education and Health Separate estimation on assignable goods – Education – Health Considerable variation in education expenditures – High in East Asia Health expenditures concentrated on the elderly even in lower income countries

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22 Non-assignable goods How to allocate non-assignable goods? – Engel’s Method? Problematic. Also there is measurement error problem. – A priori allocation (0.5 for children, 1 for adult or any other proportion)?

23 Consumption Allocation Indonesia - Susenas split+engelengel a0.5split+a1

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25 Importance of Public Consumption Government consumption becomes more important with development, although with considerable variation Government consumption often targets young and old with important implications for trends in age profiles

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31 The End