How Much Consumption Insurance in Bewley Models with Endogenous Family Labor Supply?
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.
We thank Greg Kaplan and Luigi Pistaferri for useful conversations at an early stage of this project. Krueger gratefully acknowledges financial support from the NSF under grant SES-0820494. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.