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CEE/Education and skills discussion paper
The Timing of Parental Income and Child Outcomes: The Role of Permanent and Transitory Shocks
Emma Tominey
October 2010
Paper No' CEEDP0120:
Full Paper (pdf)

JEL Classification: D12; J13

Tags: income; pupil outcomes; shocks

How do shocks to parental income drive adolescent human capital, including years of schooling, high school dropout, university attendance, IQ and health? A structural model decomposes household shocks into permanent and transitory components, then the effect of shocks at age 1-16 is estimated for 600,000 Norwegian children. The effect of permanent shocks declines - and of transitory shocks is small and constant across child age, suggesting parents optimise similarly to consumption. However there is a lower effect of transitory shocks for liquidity constrained parents. An interpretation is that these parents use income shocks for essential consumption rather than investment.