On the Distribution of the Welfare Losses of Large Recessions

Dirk Krueger, Kurt Mitman and Fabrizio Perri

No 22458, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E21 E32 J65 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
Note: EFG LS ME PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://www.nber.org/papers/w22458.pdf (application/pdf)

Related works:
Working Paper: On the Distribution of the Welfare Losses of Large Recessions (2016)
Working Paper: On the Distribution of the Welfare Losses of Large Recessions (2016)
Working Paper: On the Distribution of the Welfare Losses of Large Recessions (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:22458

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w22458

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().