The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Consumption Smoothing Among Working-Class American Families Before Social Insurance
Michael G. Palumbo, John A. James, and Mark Thomas

Abstract: This paper examines whether the saving decisions of a large sample of working-class American families around the turn of the twentieth century are consistent with consumption smoothing tendencies in the spirit of the permanent income hypothesis. We develop two econometric models to decompose reported annual incomes from micro-data into expected and unexpected components, then we estimate marginal propensities to save out of each component of income. The two methodologies deliver similar regression estimates and reveal empirical patterns consistent with those reported in other recent research based on quite different contemporary household data. Marginal propensities to save out of unexpected income shocks are large relative to propensities based on expected income movements, though the former lie much below one and the latter much above zero. While these data reject strict parameterizations of the permanent income hypothesis, we nonetheless conclude that families' saving decisions in the historical period look quite "modern."

Keywords: Unemployment risk, permanent income hypothesis, precautionary saving

Full paper (154 KB PDF) | Full paper (1503 KB Postscript)

Home | Economic research and data | FR working papers | FEDS | 1999 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: July 6, 1999