Wage Risk and Government and Spousal Insurance

Mariacristina De Nardi and Giulio Fella

No 44, Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis

Abstract: The extent to which households can self-insure and the government can help them to do so depends on the wage risk that they face and their family structure. We study wage risk in the UK and show that the persistence and riskiness of wages depends on one's age and position in the wage distribution. We also calibrate a model of couples and singles with two alternative processes for wages: a canonical one and a flexible one that allows for the much richer dynamics that we document in the data. We use our model to show that allowing for rich wage dynamics is important to properly evaluate the effects of benefit reform: relative to the richer process, the canonical process underestimates wage persistence for women and generates a more important role for in-work benefits relative to income support. The optimal benefit configuration under the richer wage process, instead, is similar to that in place in the benchmark UK economy before the Universal Credit reform. The Universal Credit reform generates additional welfare gains by introducing an income disregard for families with children. While families with children are better off, households without children, and particularly single women, are worse off.

Keywords: Government; Government benefits; Self-insurance; Wage risk; Family (search for similar items in EconPapers)
JEL-codes: D15 H24 (search for similar items in EconPapers)
Pages: 51
Date: 2020-12-23
New Economics Papers: this item is included in nep-dge, nep-ias and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Wage Risk and Government and Spousal Insurance (2020)
Working Paper: Wage Risk and Government and Spousal Insurance (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmoi:89241

DOI: 10.21034/iwp.44

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