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 US data. In the model, 35 percent of male and 18 percent of female permanent wage shocks pass through to consumption,
compared to the empirical estimates of 32 percent and 19 percent. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply
response of the female earner. Abstracting from this private intrahousehold income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the
desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the
welfare gains from implementing the optimal system are cut roughly in half.
Wu, Chunzan, and Dirk Krueger.
"Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation."
American Economic Journal: Macroeconomics,
Intertemporal Household Choice; Life Cycle Models and Saving
Taxation and Subsidies: Efficiency; Optimal Taxation
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Economics of Gender; Non-labor Discrimination
Time Allocation and Labor Supply
Wage Level and Structure; Wage Differentials