Crisis, Inequality and Social Insurance

Abstract

In this paper I present the ideas, preliminary results and future steps of a long term project aimed at investigating the distributional consequences of aggregate crises and the role of inequality and social insurance in shaping aggregate activity in times of crisis. For that, I develop a theoretical heterogeneous agents incomplete markets DSGE model, with both ex-ante and ex-post household heterogeneity, and one important source of social insurance, unemployment insurance. A first quantitative experiment, aimed at exploring the model's main properties and mechanisms, produces several preliminary results. First, ex-ante heterogeneity matters. Results for economies where there is only ex-post heterogeneity are significantly different from results for economies where there are both types of heterogeneity. Second, the model generates a substantial rise in inequality following a crisis, as a result of an increase in the probabilities of becoming or remaining unemployed. Third, social insurance helps to mitigate the impact of a crisis on aggregate consumption and this effect is stronger for a higher degree of heterogeneity. Finally, a progressive insurance scheme produces a higher mitigation effect than a flat one. By shedding new light on how social insurance policies may shape the impacts of an aggregate crisis, this work contributes to the recent but essential literature on the relevance of considering distributional aspects when targeting macroeconomic objectives.