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On the Distribution of the Welfare Losses of Large Recessions

Dirk Krueger (), Kurt Mitman and Fabrizio Perri ()

No 11413, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: great recession; Social Insurance; Wealth Inequality (search for similar items in EconPapers)
JEL-codes: E21 E32 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse, nep-dge, nep-ias, nep-lab, nep-mac and nep-pbe
Date: 2016-07
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Working Paper: On the Distribution of the Welfare Losses of Large Recessions (2016) Downloads
Working Paper: On the Distribution of the Welfare Losses of Large Recessions (2016) Downloads
Working Paper: On the Distribution of the Welfare Losses of Large Recessions (2016) Downloads
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