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Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States

In: Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16

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  • Raj Chetty
  • Adam Looney

Abstract

This paper examines the welfare consequences of social safety nets in developing economies relative to developed economies. Using panel surveys of households in Indonesia and the United States, we find that food consumption falls by approximately ten percent when individuals become unemployed in both countries. This finding suggests that introducing a formal social insurance program would have small benefits in terms of reducing consumption fluctuations in Indonesia. However, in contrast with households in the U.S., Indonesians use costly methods such as reducing human capital investment to smooth consumption. The primary benefit of social insurance in developing countries may therefore come not from consumption smoothing itself but from reducing the use of inefficient smoothing methods.

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This chapter was published in:

  • Takatoshi Ito & Andrew K. Rose, 2007. "Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number ito_07-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0374.

    Handle: RePEc:nbr:nberch:0374

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    1. Raj Chetty & Adam Looney, 2005. "Consumption Smoothing and the Welfare Consequences of Social Insurance in Developing Economies," NBER Working Papers 11709, National Bureau of Economic Research, Inc.
    2. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392 Elsevier.
    3. Stefan Dercon, 2002. "Income Risk, Coping Strategies, and Safety Nets," World Bank Research Observer, World Bank Group, vol. 17(2), pages 141-166, September.
    4. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Harvard Institute of Economic Research Working Papers 1727, Harvard - Institute of Economic Research.
    5. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 546-72, July.
    6. Elizabeth Frankenberg & James P. Smith & Duncan Thomas, 2004. "Economic Shocks, Wealth and Welfare," Labor and Demography 0403030, EconWPA.
    7. Duncan Thomas & Kathleen Beegle & Elizabeth Frankenberg, 2000. "Labor Market Transitions of Men and Women During an Economic Crisis: Evidence from Indonesia," Working Papers 00-11, RAND Corporation Publications Department.
    8. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
    9. Elizabeth Frankenberg & Duncan Thomas & Kathleen Beegle, 1999. "The Real Costs of Indonesian Economic Crisis: Preliminary Findings from the Indonesia Family Life Surveys," Working Papers 99-04, RAND Corporation Publications Department.
    10. Roger Gordon & Wei Li, 2005. "Tax Structure in Developing Countries: Many Puzzles and a Possible Explanation," NBER Working Papers 11267, National Bureau of Economic Research, Inc.
    11. Robert Holzmann & Steen Jørgensen, 2001. "Social Risk Management: A New Conceptual Framework for Social Protection, and Beyond," International Tax and Public Finance, Springer, vol. 8(4), pages 529-556, August.
    12. Paul Gertler & Jonathan Gruber, 1998. "Insuring Consumption Against Illness," JCPR Working Papers 41, Northwestern University/University of Chicago Joint Center for Poverty Research.
    13. Gertler, Paul & Levine, David I. & Moretti, Enrico, 2003. "Do Microfinance Programs Help Families Insure Consumption Against Illness?," Center for International and Development Economics Research, Working Paper Series qt5811j217, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    14. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
    15. Browning, Martin & Crossley, Thomas F., 2001. "Unemployment insurance benefit levels and consumption changes," Journal of Public Economics, Elsevier, vol. 80(1), pages 1-23, April.
    16. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
    17. Lisa A. Cameron & Christopher Worswick, 2003. "The Labor Market as a Smoothing Device: Labor Supply Responses to Crop Loss," Review of Development Economics, Wiley Blackwell, vol. 7(2), pages 327-341, 05.
    18. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
    19. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    20. Thomas, Duncan & Beegle, Kathleen & Frankenberg, Elizabeth & Sikoki, Bondan & Strauss, John & Teruel, Graciela, 2004. "Education in a crisis," Journal of Development Economics, Elsevier, vol. 74(1), pages 53-85, June.
    21. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
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    Cited by:
    1. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "Involuntary unemployment and the business cycle," CQER Working Paper 2010-03, Federal Reserve Bank of Atlanta.
    2. Pande, Rohini, 2008. "Understanding Political Corruption in Low Income Countries," Handbook of Development Economics, Elsevier.
    3. Yasushi Iwamoto & Miki Kohara & Makoto Saito, 2009. "On the Consumption Insurance Effects of Long-term Care Insurance in Japan: Evidence from Micro-level Household Data," Global COE Hi-Stat Discussion Paper Series gd09-109, Institute of Economic Research, Hitotsubashi University.
    4. Bruno Rocha, 2010. "At Different Speeds: Policy Complementarities and the Recovery from the Asian Crisis," Working Papers id:3294, eSocialSciences.
    5. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367 Elsevier.
    6. Jungho Kim & Alexia Prskawetz, 2010. "External Shocks, Household Consumption and Fertility in Indonesia," Population Research and Policy Review, Springer, vol. 29(4), pages 503-526, August.
    7. World Bank, 2006. "Making the New Indonesia Work for the Poor," World Bank Other Operational Studies 8172, The World Bank.
    8. Jorge Andrés Tamayo & Jairo Núñez & Carlos Medina, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," IDB Publications 82158, Inter-American Development Bank.
    9. Lawrence J. Christiano, 2011. "Comment on "Unemployment in an Estimated New Keynesian Model"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 361-380 National Bureau of Economic Research, Inc.
    10. Chetty, Raj & Looney, Adam, 2006. "Consumption smoothing and the welfare consequences of social insurance in developing economies," Journal of Public Economics, Elsevier, vol. 90(12), pages 2351-2356, December.

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