Centre for Development Economics
Department of Economics

Delhi School of Economics


Insurance Cyclicality


Anand Chopra (Department of Economic Sciences, IIT Kanpur)
(Thursday, March 9, 2023, 3:15 PM IST)
Venue: New seminar room (Room 116)


This paper investigates how households smooth consumption against idiosyncratic wage shocks in recessions and expansions. Labour market uncertainty amplifies during recessions, captured through the cross-sectional dispersion of wages. I focus on the relative contribution of two insurance mechanisms to wage changes, namely, adjustments in labour supply and assets, during periods of high and low uncertainty. I exploit variation in expenditure, hours worked and wages over the business cycle to wage shocks, and apply it to US household panel data. I document a new empirical fact — the contribution of labour supply to consumption smoothing increases during labour market downturns. Households with low liquid wealth show the strongest asymmetric labour supply response between recessions and expansions. To jointly explain these empirical facts, I develop an incomplete market life-cycle model with multiple asset-types (liquid and illiquid) and an aggregate state that affects wage dispersion. The model shows that the key mechanism is the shift in portfolio composition towards liquid assets during high uncertainty periods.

All are cordially invited.

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