The Marriage Market, Wage Risk and Tax Progressivity
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Abstract:
How does wage risk affect consumption and well-being? We study this question using a two-earner life-cycle model with limited commitment and marital status dynamics. We calibrate our model to the US economy and study the individual-level transmission of shocks into consumption and welfare, highlighting gender asymmetries in the welfare impact of shocks. We find that a standard unitary model would underestimate the welfare cost of wage risk by 33%. In addition, eliminating income tax progressivity through a flat tax has a much stronger welfare effect on women (-9.5%) than on men (-2.2%), which would not be captured by a unitary model.
Bio: