Composite policy reform

In the previous parts, I have examined the implications of single modifications to the unem- ployment insurance system in both economies. As a final exercise, this section proposes an exemplary policy reform that is composed of various changes to the benchmark. The objective is to conduct a quantitative assessment of this reform in terms of important aggregate vari- ables and welfare, and to highlight the driving forces depending on whether intrahousehold risk sharing is available or not. Specifically, the unemployment insurance system after the reform shall be characterized as follows: (a) reduce the replacement rate to 15% and freeze total expenditures that would be necessary to finance benefits at this level; (b) decrease the replacement rate of female benefits further to 12.5% and raise the replacement rate of male benefits accordingly to keep total expenditures constant; (c) set the tax rate on female labor income to zero and raise the tax rate on male labor income accordingly to finance benefits.

12_{Net wage changes and price changes are only shown for the collective economy. The corresponding figures}

−1.5 −1 −0.5 0 0.5 1 1.5 2 2.5 −4 −3 −2 −1 0 1 2 3 4

Welfare − collective economy (in %)

Tax rate for females in %

Females Males −1.5 −1 −0.5 0 0.5 1 1.5 2 2.5 −4 −3 −2 −1 0 1 2 3 4

Welfare − bachelor economy (in %)

Tax rate for females in %

Females Males −1.5 −1 −0.5 0 0.5 1 1.5 2 2.5 −3 −2 −1 0 1 2 3 4

Net wage changes (in %) − collective economy

Tax rate for females in %

Female Male −1.5 −1 −0.5 0 0.5 1 1.5 2 2.5 −0.01 −0.008 −0.006 −0.004 −0.002 0 0.002 0.004 0.006 0.008 0.01

Price changes (in %) − collective economy

Tax rate for females in %

Interest rate r Gross wage rate

3.5. CONCLUDING REMARKS 109

Table 3. Composite policy reform: Change in aggregate variables (in %)

Y K L Lf _Lm _Wf _Wm _W

Collective economy + 0.40 + 0.37 + 0.42 + 1.40 − 0.08 − 0.56 + 0.54 + 0.056 Bachelor economy + 0.12 + 0.13 + 0.11 − 0.48 + 0.50 + 1.57 − 1.01 + 0.236

Table 3 summarizes the long-run implications of this policy reform mix. Aggregate capital and aggregate labor increase independently of whether intrahousehold risk sharing is available or not. Total output increases by 0.4 percent in the collective economy and by 0.12 percent in the bachelor economy. When differentiated by gender, the reform generates distinct ad- justments in both economies. While females choose to work less in an economy with bachelor households, they work longer hours when sharing risks with a spouse: the collective model predicts an increase of female labor supply by almost 1.5%. Hours worked by males remain almost unaffected in the economy with intrahousehold risk sharing, whereas in the bachelor model males choose to work longer hours. The reform mix brings about welfare gains in both economies: measured in consumption equivalents, expected welfare goes up by 0.06% and 0.24% respectively. Gender-specific welfare effects depend very much on risk-sharing opportunities, though: while females draw relatively large benefits from the modified unem- ployment insurance system when living as bachelors, they suffer significant losses when living in a collective household; the opposite is true for males.

3.5

Concluding Remarks

The main contribution of this study is to show that the trade-off between distortionary fiscal policy and public risk sharing may be critically affected by informal risk sharing agreements such as the family. Reforms to the design of the unemployment insurance system typically have distinct implications for individual and aggregate allocations, depending on whether intrahousehold risk sharing is available or not. It is also revealed that policies targeting in- dividuals of one gender can lead to unexpected outcomes, if they do not acknowledge the bargaining process between spouses. Finally, there is some evidence that gender-based taxa- tion and replacement rates can give rise to welfare and output gains.

The framework presented in this paper involves a number of restrictions. For example, since only unemployed workers are entitled to benefits, there is no endogenous participation deci- sion. Introducing voluntary unemployment would create an additional margin that could play a role when comparing the collective household to the bachelor household. Since females are

typically secondary earners in multi-person households, higher taxes and overgenerous bene- fits could both distort incentives. A related extension worth pursuing could be to investigate policy reforms that condition benefit payments on the employment status of the spouse, if present. Family insurance is shown to go a long way in smoothing income and consumption, as long as either of the two breadwinners is employed. Providing additional public insurance for the worst-case scenario, i.e. when both spouses are unemployed, at the expense of less insurance for intermediate cases, i.e. when only one spouse is unemployed, could improve the benefit of public risk sharing without touching the taxation side.

A different way to proceed would be to add labor market frictions to the model. There is a large literature studying the interaction between unemployment insurance and labor market outcomes if workers have to search for jobs and are matched stochastically. However, very little work has been done on how the presence of multiple persons in the household impacts on these theories.13

13

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