DP12828 How Much Consumption Insurance in Bewley Models with Endogenous Family Labor Supply?

Author(s): Dirk Krueger, Chunzan Wu
Publication Date: March 2018
Keyword(s): Bewley Models, Consumption Insurance, Labor Supply
JEL(s):
Programme Areas: Labour Economics, Public Economics, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12828

We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. With additively separable preferences, 43% of male and 23% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 34% and 20%. With non-separable preferences the model predicts more consumption insurance, with pass-through rates of $29% and $16%. Most of the consumption insurance against permanent male wage shocks is provided through the labor supply response of the female earner.