Consumption Commitments and Unemployment Insurance
Abstract
Households allocate more than 40% of their budget to goods and services that are difficult to adjust, such as rents, mortgages, insurance, or mobile plan contracts. Each quarter only about 11% of households adjust the consumption of such items, which are called “commitments”. Commitments imply monthly payments that are hard to avoid and make employment and income fluctuations more costly. In this paper, we study the role of unemployment insurance when households consume two goods, an adjustable good and a commitment good. We build a search model with heterogeneous agents and incomplete markets, where individuals face unemployment shocks and exert effort to find a job while unemployed. The government runs an unemployment insurance (UI) program. The model is calibrated to the US economy and matches, among other targets, the elasticity of unemployment duration with respect to the UI generosity. We first show that reducing the UI generosity significantly affects search effort and unemployment durations in the benchmark economy. In contrast, the effects are smaller in an economy without commitments. Commitments also induce households to build larger precautionary savings. We then calculate the welfare benefits of unemployment insurance. In the benchmark economy with commitments, eliminating the UI implies a welfare cost of around 4.5% (measured by a consumption compensating variation). The cost is higher for poorer households. In an economy without commitments, the welfare cost of eliminating UI is only 3.4%. The optimal UI replacement rate is 65% in the benchmark economy, higher than the current US policy (50%).
Intergenerational Persistence in Welfare Program Participation (with Borja Petit)
Paper presented in the European Winter Meeting of the Econometric Society 2021, SEHO 2022.
(draft avaliable upon request)
Abstract
Participation in social insurance (welfare) programs exhibits a significant persistence across generations. Children of welfare program participants are more likely to participate in these programs when they become adults, even after controlling for their income. This suggests some persistence in some underlying factors that affect the participation decisions of eligible households. While some eligible households in need might choose not to participate, other eligible households in better conditions benefit from welfare programs, limiting the effectiveness of these programs. To understand the source of this persistence and its implications on households and their children, we build a quantitative model overlapping generations with heterogeneous agents and incomplete markets. In the model, poor households may decide not to receive welfare transfers due to a utility cost from program participation. This cost depends on whether parents of a household had participated in welfare programs. Households also invest money and time in children's skills, which determine their labor-market ability as adults. The model is calibrated to the US data on welfare participation, income inequality, and intergenerational mobility from the 2000s. Using our calibrated model, we study how much of the persistence in welfare participation is due to the cost of participation and how this persistence affects parental investment in children. We find that around 20% of the intergenerational correlation in welfare participation can be explained by the transmission of the welfare culture across generations.
Reforming the Individual Income Tax in Spain (with Nezih Guner and Roberto Ramos), SERIEs (The Journal of the Spanish Economic Association) November 2020, Volume 11, Issue 4, pages 369-406
Abstract
Can the Spanish government generate more tax revenue by making personal income taxes more progressive? To answer this question, we build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. Our answer is yes, but not much. A reform that increases labor income taxes for individuals who earn more than the mean labor income and reduces taxes for those who earn less than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The increase in revenue from labor income taxes is only 0.82%, while the total tax revenue declines by 1.55%. The higher progressivity is associated with lower aggregate labor supply and capital. As a result, the government collects higher taxes from a smaller economy. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The rise in tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than €41,699) raises total tax revenue by 2.81%.