Working Paper: NBER ID: w13673
Authors: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
Abstract: Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, we provide an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. Our analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the cost associated with missing insurance markets. On the other hand, greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers. Our welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk, or alternatively in terms of changes in observable second moments of the joint distribution over individual wages, consumption and hours.
Keywords: No keywords provided
JEL Codes: E21; J22; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage dispersion (J31) | welfare costs (I30) |
| wage uncertainty (J31) | welfare loss (D69) |
| market completeness (G10) | welfare (I38) |
| risk elimination through distortionary taxation (H31) | welfare gains (D69) |
| risk elimination (G22) | productivity losses (J17) |