Rethinking the Welfare State

The existing general equilibrium models that economists use to evaluate social insurance policies largely rely on models populated by single-earner households. In such models a single decision maker, given government policies, decides how much to work and how much to save. Today's household structure, however, should force us to think beyond single-earner household models. The role of social insurance policies for an economy in which every household has only one worker can be very different than for an economy in which both household members work. Similarly, the role of social insurance policies can also be very different for an economy with low degree of assortative matching in which agents from different educational backgrounds mix with each other by marriage than for an economy with more segregation in marriages. Social policy can also play a very different role for an economy with low gender wage gap than one with high-gender wage gap. Finally, thinking beyond single-earner households should also force us to consider very diverse social insurance policies, such as income maintenance programs and parental leave policies, under the same light. Despite this background, we are unaware of systematic attempts to study public policies in environments that allow for heterogeneous two-earner households that face uninsurable idiosyncratic risk, an explicit consideration of labor supply responses in extensive and intensive margins, and a rich description of marital status of population (who is married with whom). We fill this void in this paper.