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Title: Precautionary Savings or Working Longer Hours?

Author(s): Josep Pijoan-Mas

Publication Date: October 2005

Keyword(s): incomplete markets, labour supply and precautionary savings

Programme Area(s): International Macroeconomics, Labour Economics and Public Economics

Abstract: 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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Bibliographic Reference

Pijoan-Mas, J. 2005. 'Precautionary Savings or Working Longer Hours?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5322