Household labor supply and the gains from social insurance

Abstract

The marginal gains from social income insurance programs are captured by the gap in the marginal utility of consumption across states of nature. To identify this gap in the context of the household, this paper offers a new labor-supply based approach that leverages household-level economic interactions and optimality conditions. We demonstrate that, in frameworks of efficient household allocations, spousal labor supply responses to shocks have direct implications for the gains from more generous government benefits to households. We show that this holds for both intensive and extensive margin responses under fairly general conditions. Our analysis illustrates how labor market data can be used for assessing marginal welfare gains in a general class of social insurance schemes, including the large and important programs of disability insurance and survivors benefits. Hence, household labor supply behavior and responses to shocks, which are widely studied in theoretical and empirical work, hold valuable information for the optimal design of social insurance.