Precautionary savings or working longer hours? |
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| Affiliation: | 1. CEMFI, Casado del Alisal 5, 28014 Madrid, Spain;2. CEPR, 90-98 Goswell Road, London EC1V 7RR, UK;1. Boston University, United States;2. Institute of Industrial Economics, Jinan University, China;3. AFR, Zhejiang University, China;4. Hong Kong University of Science and Technology, Hong Kong;1. Bank of Canada, 234 Laurier Avenue West Ottawa, Ontario, Canada K1A 0G9;2. European University Institute, Florence, Italy;3. Universitat Autonoma de Barcelona, Barcelona, Spain;4. CEPR, United Kingdom;1. Ministry of Strategy and Finance, South Korea;2. University of Rochester, USA;3. Yonsei University, South Korea;1. Department of Economics, University of Miami, 314P Jenkins Building, Coral Gables, FL, 33146, USA;2. Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637, USA;1. School of Economics and Business, Universidad del Desarrollo, Av. Plaza 680, San Carlos de Apoquindo, Las Condes, Santiago de Chile, Chile;2. School of Economics and Business, University of Chile, Diagonal Paraguay 265, Suite 1906, Santiago de Chile |
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| Abstract: | This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor 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 labor 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. |
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