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Insurance and Opportunities: A Welfare Analysis of Labor Market Risk (2007)
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BibTeX
@MISC{Heathcote07insuranceand,
author = {Jonathan Heathcote and Kjetil Storesletten and Giovanni L. Violante},
title = {Insurance and Opportunities: A Welfare Analysis of Labor Market Risk },
year = {2007}
}
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Abstract
Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, the paper provides 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.
Keyphrases
welfare effect welfare analysis labor market risk wage dispersion individual wage endogenous labor supply analytical characterization observable second moment constant relative risk-aversion preference idiosyncratic wage risk welfare gain partial insurance joint distribution market work wage uncertainty wage risk important trade-off productive worker welfare calculation insurance market aggregate productivity
