1. Timing of Permanent &Transitory Income Shocks: Child Outcomes Emma Tominey
1) Introduction
Aim
Understand how to raise adolescent outcomes, e.g.
↓ probability high school drop out
↑ probability go to university
Question
What is the role of FAMILY INCOME SHOCKS
(unexpected change in family income)
Innovations
Estimate ACROSS CHILD AGE
Distinguish by duration of shock
Permanent shock: e.g. disability
Transitory shock: e.g. unemployment
Estimate
Effect of Permanent and Transitory shocks
at ages 1,2,...,16
on child adolescent outcomes (schooling & ability)
2) Data
Norwegian register & administrative data
All children born 1970s ≈ 600,000
Annual Household Income
Mum/dad education & age birth, marital status
Outcomes age 18-26
Years schooling, high school dropout, university, ability
3) Methodology
2 steps
i) Decompose income shocks to permanent & transitory components
Assume Structural model for income (y)
Permanent Income : Random Walk
Transitory Income : MA(1)
Z: deterministic covariates
Identify from covariance restrictions: GMM
NB: cohort/labour market level
ii) Estimate effect of shocks in reduced form human capital production function
Family fixed effect (μ) correlated with
initial condition in income (P0)
4) Results
The two innovations of my paper prove important
For all outcomes:
Effect of permanent shocks largest when children young, declines across age
Age 1: sd Δ ⇒ 0.08 sd Age 16: std dev Δ ⇒ sd
Effect of transitory shocks smaller and constant across child age
sd Δ ⇒ std dev
5) Policy Implications
Families currently insured against TRANSITORY income shocks
But high value to insuring families with young children against PERMANENT shocks
6) Future Work
MECHANSMS: when hit with an income shock, what do families do?
move to a better neighbourhood & school
use savings & assets to insure children
Contact Information: E: W: T: +44 (0)