Working Paper: NBER ID: w14901
Authors: Hamish Low; Costas Meghir; Luigi Pistaferri
Abstract: We specify a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects. The sources of risk are shocks to productivity, job destruction, the process of job arrival when employed and unemployed and match level heterogeneity. In contrast to simpler models that attribute all income fluctuations to shocks, our framework disentangles variability due to shocks from variability due to the responses to these shocks. Estimates of productivity risk, once we control for employment risk and for individual labour supply choices, are substantially lower than estimates that attribute all wage variation to productivity risk. Increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving. Increases in employment risk have large effects on output and, primarily through this channel, affect welfare. The welfare value of government p rogram s such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks.
Keywords: wage risk; employment risk; life cycle; social insurance
JEL Codes: D91; E21; H31; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increases in productivity risk (O49) | significant welfare losses for individuals (D69) |
| significant welfare losses for individuals (D69) | substantial precautionary savings (D14) |
| increases in employment risk (J63) | reduced employment opportunities (J68) |
| increases in employment risk (J63) | adverse effects on output and welfare (D69) |
| productivity risk (controlled for employment risk and individual labor supply choices) (J29) | lower estimates than previous estimates of wage variation (J31) |
| government programs like food stamps (H53) | greater welfare value compared to unemployment insurance (J65) |