Labor Income and Consumption United States, 1888-2003 Fourth Annual National Transfer Accounts Workshop Berkeley, California January 19, 2007 Gretchen Donehower UC Berkeley Department of Demography NOTES:

Outline Review current labor income and consumption age profiles (2003) Discuss historical data Review changes in labor income and consumption from 1888 to 2003

Life Cycle Deficits, 2003 NOTES: Three lines we’ll be focussing on today: consumption, labor income and life cycle deficit. Many of you have seen these shapes for the US before. What’s new is estimates for institutionalized population and new health care consumption estimates which make consumption at end of life go from a steady rise to and exponential climb right at the end. In the US currently, most of the early deficit is financed through family transfers although some is government-provided public education. The late deficit is financed many ways - through use of savings, through government-provided pension and health care benefits, and through families. Summary profiles are actually built up from more narrowly defined profiles. We’ll look at the main components in a moment.

Components of Labor Income, 2003 NOTES: Most of labor income is now made up of labor earnings. All types of labor income here have peak in middle age, but this has not always been the case for all types of income as we will see.

Components of Consumption, 2003 NOTES: Note the exponential rise in health spending at the end of life, ESPECIALLY public. This is a new thing for us that we see now that we’ve added new estimates for institutionalized persons into the mix. (Note that private even goes down a little after public health benefits kick in. But then rises again steeply in the final years.)

Current and Historical Data Multiple surveys, administrative data Represents total population Historical (1888, 1917, 1935) Consumer Expenditure Survey, administrative data Early samples not nationally representative No information on institutionalized population 1888: Industrial workers and their children 1917: Industrial workers and their families NOTES: Current Data: CEX, CPS, SCF, Nursing Home surveys, …. For some variables, we have the luxury of picking the best survey to measure each piece. Historical is just CEX and administrative and misses many people Note the weird early samples miss the post-childhood pre-family formation life stage. A bit about on institutionalized issue on next slide (how many we’re missing because of no institutionalized people). More work needs to be done to assess the effect the strange samples might have on the age shapes.

Institutionalized Population Early surveys miss institutional population, but there were far fewer back then, even among the elderly NOTES: So the proportion of institutionalized elderly has been going up quite a bit over the century, although slight decrease from 1980 to 2000. You can see, though, that missing these people before 1960 is not so as bad as missing them now would be.

Labor Income and Consumption, 1888-2003 Dollars (US, 2000) NOTES: So you can see a few things over time: Lots of smoothing in early profiles - sparse surveys Changing shape of consumption - increasing at older ages Changing shape of labor income - narrowing years of peak earnings. How to compare across time when scale is changing? (Even after adjusting to constant dollars, economic growth has been pretty steady over the past 115 years.) USUAL NTA TRICK OF SCALING TO (UNWEIGHTED) AVERAGE LABOR INCOME VALUE FOR AGES 30-49 Age

Scaled Life Cycle Deficits, 1888-2003 NOTES: Labor Income: Mid-life labor income flat LATE LIFE HIGH INCOME PROBABLY PRODUCT OF WEIRD SAMPLE Consumption Early adult bump happens because kids are expensive! Consuming a lot when you only have one of them, but as you get more, the adult shares decrease. Bump also from weird sample. Young adults in this survey are mostly workers with young children. Their peers who have not set up their own households yet are probably consuming a lot less as boarders/lodgers (not in survey) or still living with their own parents. We also don’t have a good “flow value” of the consumption of owned housing (part of durables) in this survey, it’s just given equally to anyone who owns a house (with consumer weights within the household). Life Cycle Deficit Not much surplus, but pretty small deficits, too.

Scaled Life Cycle Deficits, 1888-2003 NOTES: Labor Income: Gets more peaked, PROBABLY DUE TO SAMPLE CHANGE. Decrease at older ages is a little bit due to lower labor force participation, but mostly change in sample (households now include coresident elderly) Consumption Consumption shape is a little less weird because of the more general sample. (You do get some young adults with no kids yet.) Life Cycle Deficit Grows at older ages

Scaled Life Cycle Deficits, 1888-2003 NOTES: Sample is now urban families with native born head; didn’t use rural part of survey because of too much missing consumption data. Labor Income: This is the Great Depression - young people can’t get a job and old people hold on to theirs if they have one (lots of self-employment income, too, as we’ll see) Consumption Shape is similar to 1917, maybe flatter after adulthood Life Cycle Deficit Grows at young ages, shrinks at older ages

Scaled Life Cycle Deficits, 1888-2003 NOTES: Labor Income: Incomes back up for younger people, good time to be young worker Good time to be older worker, too, because you get to retire! Consumption Consumption lower relative to peak income… incomes have risen a lot in this period, but basic shape is preserved. Life Cycle Deficit Shrinks at young ages, grows at older ages.

Scaled Life Cycle Deficits, 1888-2003 NOTES: Labor Income: Later entry into labor force for young people Earlier exit from labor force for old people Consumption Shape beginning to change, no longer hump shaped but increasing to flat. Mid-life people getting to consume relatively less Life Cycle Deficit Grows at young and old ages, but incomes are keeping up strongly in mid-life with big surpluses Starting to see modern welfare state: working age people consuming less as their surplus is taxed to provide for more consumption of dependents. We’ll see components of this later.

Scaled Life Cycle Deficits, 1888-2003 NOTES: Labor Income: Ever later entry into the labor force for education (and lower wages for those who don’t get that education?) Some increase in profile at oldest ages (higher incomes? Less retirement? Suggests interesting decomposition analysis...) Consumption More education consumption at younger ages, but BIG increases at older ages Strong difference in this shape compared to all other years Life Cycle Deficit Grows at youngest and oldest ages, but for first time we see that surplus area is shrinking, too

Scaled Life Cycle Deficits, 1888-2003 NOTES: Close-up look of just deficits. 2003 is clearly out on a limb, historically speaking.

Components of Labor Income NOTES: Notice early years have high self-employment income and it’s going, in large part, to older people. Notice fringe benefits “replace” self-employment income, but with age-specific consequences.

Components of Consumption NOTES: Rising “public other” over time, falling “private other”. Big increase in health spending at older ages and education spending at younger ages.

Summary of Changes Over Time Young Consumption includes much more education Old More health-related consumption, public and private, rising exponentially at oldest ages Working Ages Recently, fewer years making smaller surplus Consumption falls relative to other age groups, as transfers to them increase?