Macroeconomic Conditions and Updating of Expectations by Older Americans

Authors

Abstract

Economic theory suggests that individual decisions about consumption, saving, and labor supply should be directly linked to subjective expectations about future events. This project uses panel data from the Health and Retirement Study from 1994-2008 merged to data on a number of local and high frequency macroeconomic indicators to estimate how individual expectations respond to fluctuations in the local and national macroeconomy. Our results suggest that individuals revise their expectations in response to both local and national macroeconomic fluctuations in ways that appear to make sense, and that this is stronger for respondents with higher levels of education.

Key Findings

  • We find that individuals’ expectations about future macroeconomic outcomes fluctuate from year to year.
  • Individuals report higher expectations about a major depression when their State’s unemployment rate is higher and when the S&P 500 declines.
  • Declines in the S&P 500 are also associated with higher expectations that the S&P 500 will rise over the next year.
  • In general, college graduates’ expectations about the future macroeconomy are more responsive to the current economic climate than are expectations of less educated individuals.
  • Individuals in poor and declining physical and mental health have significantly less optimistic expectations about the macroeconomic future.
  • Individuals from more vulnerable socioeconomic groups have lower expected probabilities of leaving bequests and higher expected probabilities of having medical expenses use up their savings. They are also significantly less likely to expect to be working past age 62 or 65, which could have important implications for their economic well-being.
  • We also find that individuals’ expectations about their future labor supply, bequests and medical expenses also fluctuate from year to year.
  • The subjective probability of working at age 65 is significantly higher when the state unemployment rate is higher and both the subjective probability of working at ages 62 and 65 are significantly lower when local house prices rise.
  • The unemployment rate effect on working longer is larger for less-educated individuals, while the house price effect is larger for more-educated individuals. This is consistent with the fact that college graduates are less likely to be affected by business cycle fluctuations, and more likely to be homeowners.

Full Text

Download PDF

Project

Paper ID

WP 2011-259

Publication Type

Working Paper

Publication Year

2011
pavement-enterprise