Working Paper: CEPR ID: DP15608
Authors: Mariacristina De Nardi; Giulio Fella; Gonzalo Paz Pardo
Abstract: The extent to which households can self-insure and the government can help them to do so depends on the wage risk that they face and their family structure. We study wage risk in the UK and show that the persistence and riskiness of wages depends on one's age and position in the wage distribution. We also calibrate a model of couples and singles with two alternative processes for wages: a canonical one and a flexible one that allows for the much richer dynamics that we document in the data. We use our model to show that allowing for rich wage dynamics is important to properly evaluate the effects of benefit reform: relative to the richer process, the canonical process underestimates wage persistence for women and generates a more important role for in-work benefits relative to income support. The optimal benefit configuration under the richer wage process, instead, is similar to that in place in the benchmark UK economy before the Universal Credit reform. The Universal Credit reform generates additional welfare gains by introducing an income disregard for families with children. While families with children are better off, households without children, and particularly single women, are worse off.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage risk (J31) | government benefits (H55) |
| individual characteristics (age, marital status) (J29) | government benefits (H55) |
| gender (J16) | wage dynamics (J31) |
| wage dynamics (J31) | effectiveness of income support (I38) |
| optimal benefit configuration (L21) | welfare gains (D69) |
| wage risk (J31) | welfare policy design (I38) |
| wage persistence (for women) (J31) | policy implications (D78) |
| universal credit reform design (P41) | welfare losses for single women (I38) |