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Precautionary Savings or Working Longer Hours?

  • Pijoan-Mas, Josep

This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labour market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labour productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5322.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5322
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