life-cycle hypothesis


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life-cycle hypothesis

the hypothesis that states that current CONSUMPTION is not dependent solely on current DISPOSABLE INCOME but is related to a person's anticipated lifetime INCOME. For example, a young worker may purchase products such as a house on extended CREDIT because he or she expects his or her future income to rise as he or she moves up a salary scale or obtains increases in basic wage rate and thus will be able to pay future interest and repayment charges. By contrast, an older worker nearing retirement may limit his or her consumption from current income in anticipation that his or her income will fall after retirement. Long-term consumption may also be related to changes in a person's WEALTH, in particular the value of his or her house, over time.

The economic significance of the life-cycle hypothesis is that in the short term the level of consumption may be higher (or lower) than that indicated by the level of current disposable income. See KEYNESIAN ECONOMICS, CONSUMPTION FUNCTION, PERMANENT INCOME HYPOTHESIS.