Consumption, Leisure, and the Household

Understanding people’s allocation of time is empirically important to understanding shifts in expenditures over their life cycle, said Erik Hurst, professor of economics and Neubauer Family Faculty Fellow. “For example, as they get older people reduce the prices they pay by 3 percent, but substitute their consumption with shopping and food preparation,” Hurst said during a panel at the 2007 Conference on Chicago Economics, presented by the Becker Center on Chicago Price Theory at the Charles M. Harper Center November 10.

The empirical significance of time allocation also affects trends in leisure, especially among women who engage in a large amount of non-market production, and changes in interpretations of rising inequality among the highly educated and under-educated individuals, he said. “There is a huge decline in leisure inequality starting in the mid-1980s, which is the same time consumption inequality in the United States started to change,” Hurst said.

Data showing poor Indian villages share idiosyncratic risk effectively contains dramatic policy implications, said Robert Townsend, Charles E. Merriam Distinguished Service Professor in the Department of Economics and the College. “It would suggest that rather than targeting individuals, per se, you might think about targeting villages and allow the local institutions to intermediate,” Townsend said.

This connection of family networks can also be applied to large industrial conglomerates made up of family syndicates in countries such as Thailand, India, Mexico, and Spain, he said. “Think about conglomerates as being bad in the sense of tunneling,” Townsend said. “But it’s possible, on the other hand, that these conglomerates are really working at reallocating risk and credit in the family group in this larger sea of imperfect credit markets.”

When people become chronically, severely disabled, their food consumption drops about 20 percent and their food and housing consumption combined drops 24 percent, said Bruce Meyer, McCormick Tribune Professor of the Irving B. Harris School of Public Policy Studies. Meanwhile, data shows insurance against disability is incomplete, even with programs such as Social Security Disability Insurance, Meyer said. “That doesn’t mean that things aren’t optimal, but that there is a big decline in consumption that needs to be weighed against the moral hazard effects of these programs,” he said.

During the panel, PhD student Alan Moreira learned that expenditures and consumption are significantly different statistics, he said. “If people’s expenditures decline, it doesn’t really mean that they are worse off, because maybe they are just investing more or spending more time at home,” Moreira said. “Instead of just ordering a pizza, you buy the materials and make your own. You have to account for the change of use of time in the life cycle.”

Much of what was discussed in the panel applies to public policy today, he said. “People tend to say that people who are facing retirement don’t anticipate or plan properly by saving and instead they try to make the government rescue them,” Moreira said. “The data collected and presented in this line of research shows that they do anticipate. It’s just that economists before this research did not seem to account for this anticipation. That’s why the results are important for public policy.”

- Phil Rockrohr