Precautionary Savings or Working Longer Hours?

Josep Pijoan-Mas

No 5322, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labour 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 labour 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.

Keywords: Incomplete markets; Labour supply; Precautionary savings (search for similar items in EconPapers)
JEL-codes: C68 D31 E21 J22 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Precautionary Savings or Working Longer Hours? (2006)
Working Paper: Precautionary Savings or Working Longer Hours? (2004)
Working Paper: Precautionary Savings or Working Longer Hours? (2003)
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