American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation
American Economic Journal: Macroeconomics
(pp. 79–113)
Abstract
We show that a calibrated life cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri, and Saporta-Eksten (2016) in US data. In the model, 35 percent of male and 18 percent of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32 percent and 19 percent. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intrahousehold income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half.Citation
Wu, Chunzan, and Dirk Krueger. 2021. "Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation." American Economic Journal: Macroeconomics 13 (1): 79–113. DOI: 10.1257/mac.20180125Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- J16 Economics of Gender; Non-labor Discrimination
- J22 Time Allocation and Labor Supply
- J31 Wage Level and Structure; Wage Differentials