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Home production and Social Security reform

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  • Michael Dotsey
  • Wenli Li
  • Fang Yang

Abstract

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Comparing our benchmark economy to one with differentiated goods but no home production, we find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing our economy to a one-good economy without home production, we show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-5.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-5

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Related research

Keywords: Housing ; Social security ; Labor supply;

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References

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  1. Mark Huggett & Gustavo Ventura, 1999. "On the Distributional Effects of Social Security Reform," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 498-531, July.
  2. Michael Dotsey & Wenli Li & Fang Yang, 2010. "Consumption and time use over the life cycle," Working Papers 10-37, Federal Reserve Bank of Philadelphia.
  3. Luisa Fuster, 1999. "Is Altruism Important for Understanding the Long-Run Effects of Social Security?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July.
  4. Abbott, Michael & Ashenfelter, Orley, 1976. "Labour Supply, Commodity Demand and the Allocation of Time," Review of Economic Studies, Wiley Blackwell, vol. 43(3), pages 389-411, October.
  5. Rupert, Peter & Rogerson, Richard & Wright, Randall, 2000. "Homework in labor economics: Household production and intertemporal substitution," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 557-579, December.
  6. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers wp173, University of Michigan, Michigan Retirement Research Center.
  7. Kaiji Chen, 2010. "A Life-Cycle Analysis of Social Security with Housing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 597-615, July.
  8. Paul Gomme & Finn Kydland & Peter Rupert, 2000. "Home production meets time-to-build," Working Paper 0007R, Federal Reserve Bank of Cleveland.
  9. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  10. Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," Working Papers wp106, University of Michigan, Michigan Retirement Research Center.
  11. Fang Yang, 2012. "Social Security Reform with Impure Intergenerational Altruism," Discussion Papers 12-01, University at Albany, SUNY, Department of Economics.
  12. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  13. Yongsung Chang & Andreas Hornstein, 2006. "Home production," Working Paper 06-04, Federal Reserve Bank of Richmond.
  14. Luisa Fuster & Ayşe İmrohoroğlu & Selahattin İmrohoroğlu, 2007. "Elimination of Social Security in a Dynastic Framework," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 113-145.
  15. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  16. Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
  17. Richard Rogerson & Johanna Wallenius, 2009. "Retirement in a Life Cycle Model of Labor Supply with Home Production," Working Papers wp205, University of Michigan, Michigan Retirement Research Center.
  18. Laitner, John & Silverman, Dan, 2012. "Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers," Journal of Public Economics, Elsevier, vol. 96(7-8), pages 615-634.
  19. repec:bla:restud:v:74:y:2007:i:1:p:113-145 is not listed on IDEAS
  20. Chang, Yongsung, 2000. "Comovement, excess volatility, and home production," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 385-396, October.
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  1. Home production and Social Security reform
    by Christian Zimmermann in NEP-DGE blog on 2012-03-23 04:03:32

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