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On the Distribution of the Welfare Losses of Large Recessions

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  • Dirk Krueger
  • Kurt Mitman
  • Fabrizio Perri
Abstract
How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one's job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.

Suggested Citation

  • Dirk Krueger & Kurt Mitman & Fabrizio Perri, 2016. "On the Distribution of the Welfare Losses of Large Recessions," NBER Working Papers 22458, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22458
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    References listed on IDEAS

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    1. Missing markets
      by chris in Stumbling and Mumbling on 2017-02-22 20:33:44

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    9. Mariacristina De Nardi & Giulio Fella, 2017. "Saving and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 280-300, October.
    10. Grimaud, Alex, 2021. "Precautionary saving and un-anchored expectations," MPRA Paper 110651, University Library of Munich, Germany.
    11. Veracierto, Marcelo, 2021. "Business cycle fluctuations in Mirrlees economies: The case of i.i.d. shocks," Journal of Economic Theory, Elsevier, vol. 196(C).
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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