Working Paper: CEPR ID: DP16479
Authors: Martin Wolf; Akshay Shanker
Abstract: In an economy with un-insurable idiosyncratic labor income risk, how should saving and work hours be distributed across income and wealth? To answer this question, we study a planner who cannot complete asset markets, but dictates how much individuals must work and save. With a U.S. calibration, the planner raises total savings but not hours, driving up aggregate wages which re-distributes income toward the consumption-poor. Across the distribution, the productive (high wage earners) should save more; the wealthy should work more; the poor should keep their work hours unchanged and take advantage of the indirect transfers from higher wages.
Keywords: Constrained Efficiency; Incomplete Markets; Pecuniary Externality; Endogenous Labor Supply
JEL Codes: D31; D52; E21; E24; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing total savings (E21) | Higher aggregate wages (J31) |
| Higher aggregate wages (J31) | Redistributing income toward the consumption-poor (E21) |
| Constrained planner internalizing pecuniary externalities (D62) | Enhancing aggregate utilitarian welfare (D69) |
| Productive agents saving more (E21) | Higher aggregate wages (J31) |
| Wealthy should work more (P12) | Higher aggregate wages (J31) |
| Poor maintaining work hours (J22) | Benefit from higher wages (J31) |