Uncertainty, Redistribution, and the Labor Market
Uncertainty and its composition can affect the demand for social insurance, and thereby the labor market. This paper shows that small to medium-sized increases in uncertainty or risk aversion are enough to recommend an expansion of the safety net that would be broadly similar to the actual safety net expansions, which significantly depressed the labor market. Labor market effects of uncertainty through investment and insurance channels are also examined with employer and employee labor wedges.
I appreciate comments from Gianluca Violante and seminar participants at the University of Chicago, Princeton, and the 2013 IZA-Brussels conference, and the financial support of the George J. Stigler Center for the Study of the Economy and the State. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.