Effects of the Price of Time on Household Saving: A Life-Cycle Consistent Model and Evidence from Micro-Data

The United States has experienced a period of declining rates of personal saving since the mid1970s. Meanwhile, average wage rates and females' labor force participation rate increased markedly, which may have affected households' consumption and saving behavior. Traditional models of saving often separated work behavior from saving behavior. Income was considered exogenous, and the cross price effect of leisure on saving was ignored. Alternative models proposed by Ghez and Becker [8] and others incorporate the allocation of time and consumption over the life cycle, and consumption and leisure are found to be substitutes.' However, few recent studies have provided evidence as to what happens to saving when time becomes more expensive.2 This study investigates the effects of the price of time (reservation wage rates) on saving of mature and stable households, focussing on couples staying married between 1983 and 1986. It develops a life-cycle consistent model of saving in which work/leisure and consumption/saving are simultaneously determined. The hypotheses of this paper concern mainly the cross price effect and wealth effect of time on household saving. Surveys of Consumer Finances (1983 and 1986) [3] and an instrumental variable procedure are used in the empirical analysis. Section II presents the model. Section III provides an overview of data and the methodology. Section IV examines the results in the reservation wage estimation and the lifetime wealth projection. Section V discusses the findings in the estimation of the saving equations and the hypothesis testing. Conclusions can be found in the final section.