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.
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We outline a macro-pandemic model where individuals can select into working from home or in the market. Market work increases the risk of infection. Occupations differ in the ease of substitution between market and home work and in the risk of infection. We examine the evolution of a pandemic in the model as well as its macroeconomic and distributional consequences. The model is calibrated to British Columbian data to examine the implications of shutting down different industries by linking industries to occupations. We find that endogenous choice to self-isolate is key: it reduces the peak weekly infection rate by two percentage points but reduces the trough consumption level by four percentage points, even without policy-mandated lockdowns. The model also produces widening consumption inequality, a fact that has characterized COVID-19.
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This paper examines the source of gender and marital status differences in portfolio choices across US households. Using the Panel Study of Income Dynamics (PSID) and the Survey of Consumer Finances (SCF), we find evidence that single female-headed households invest least in risky assets, followed by single male-headed households. Further, married households invest the most in risky assets. Towards explaining these differences in portfolio allocations, we further document that (i) women face a higher individual income risk relative to men, and (ii) two-earner married households hold a higher fraction in risky assets than single-earner married households, indicating a role for spousal insurance. To quantitatively investigate the importance of these channels, we develop a two-asset incomplete market lifecycle model with heterogeneous agents. We show that both the gender wage gap and the higher income risk faced by women are important in explaining the differences in risky investment across households.
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Does improving access to financial institutions always facilitate consumption smoothing? I document new empirical evidence that emerging economies with better access to banks are worse at consumption smoothing, whereas developed economies with better access to banks are better at consumption smoothing. This result is robust to alternative measures of domestic and international financial access and controlling for level of income. A simple one-good small open economy model supplemented with trend shocks and financial access heterogeneity is calibrated to match business cycle moments of developed and emerging markets. The model can qualitatively account for the change in the ratio of consumption volatility to income volatility to financial access for both developed and emerging economies, as seen in the data. A two-sector extension of the model captures the non-targeted business cycle moments too.
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