Working Paper: NBER ID: w22458
Authors: Dirk Krueger; Kurt Mitman; Fabrizio Perri
Abstract: How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one's job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
Keywords: Welfare Losses; Recessions; Unemployment Insurance; Household Heterogeneity
JEL Codes: E21; E32; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wealth (D14) | welfare loss (D69) |
| job loss (J63) | lifetime income (J17) |
| job loss (J63) | welfare loss (D69) |
| unemployment insurance reduction (J65) | welfare cost (D69) |
| unemployment insurance benefits (J65) | welfare loss (D69) |
| wealth distribution changes (D39) | aggregate welfare impact (F62) |
| more generous unemployment insurance (J65) | benefits for low-wealth job losers (J68) |
| more generous unemployment insurance (J65) | negative impact on those who maintain employment (F66) |