Working Paper: CEPR ID: DP5322
Authors: Josep Pijoan-Mas
Abstract: This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labour market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labour productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption.
Keywords: Incomplete Markets; Labour Supply; Precautionary Savings
JEL Codes: C68; D31; E21; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of insurance against idiosyncratic labor market risk (G52) | Increase work effort (J29) |
| Increase work effort (J29) | Decrease aggregate consumption (E21) |
| Market incompleteness (D52) | Decrease labor productivity (J29) |
| Market incompleteness (D52) | Increase welfare costs (I38) |
| Improvements in labor productivity (O49) | Increase welfare gains (D69) |