KDI Journal of Economic Policy

Korea Development Institute (한국개발연구원)
권호 표지
DOI QR코드

DOI QR Code

Social Distancing, Labor Supply, and Income Distribution

  • Received : 2021.04.13
  • Published : 2021.05.31
Download PDF
⟨ Previous Next ⟩

Abstract

The effects of social distancing measures on income distributions and aggregate variables are examined with an off-the-shelf heterogeneous-agent incomplete-market model. The model shows that social distancing measures, which limit households' labor supply, can decrease the labor supply of low-income households who hold insufficient assets and need income the most given their borrowing constraints. Social distancing measures can therefore exacerbate income inequality by lowering the incomes of the poor. An equilibrium interest rate can fall when the social distancing shock is expected to be persistent because households save more to prepare for rising consumption volatility given the possibility of binding to the labor supply constraint over time. When the shock is expected to be transitory, in contrast, the interest rate can rise upon the arrival of the shock because constrained households choose to borrow more to smooth consumption given the expectation that the shock will fade away. The model also shows that social distancing shocks, which diminish households' consumption demand, can decrease households' incomes evenly for every income quantile, having a limited impact on income inequality.

Keywords

References

  1. Achdou, Yves, Jiequn Han, Jean Michel Lasry, Pierre Louis Lions, and Ben Moll. 2020. "Income and wealth distribution in macroeconomics: a continuous-time approach," Review of Economic Studies.
  2. Aiyagari, S. Rao. 1994. "Uninsured idiosyncratic risk and aggregate saving," The Quarterly Journal of Economics, 109(3): 659-684. https://doi.org/10.2307/2118417
  3. Attanasio, Orazio, Peter Levell, Hamish Low, and Virginia Sanchez-Marcos. 2018. "Aggregating Elasticities: Intensive and Extensive Margins of Women's Labor Supply," Econometrica, 86(6): 2049-2082. https://doi.org/10.3982/ecta15067
  4. Carroll, Christopher D., Edmund Crawley, Jiri Slacalek, and Matthew N. White. 2020. "Modeling the Consumption Response to the Cares Act," NBER Working Paper.
  5. Eichenbaum, Martin S., Sergio Rebelo, and Mathias Trabandt. 2020. "The macroeconomics of epidemics," NBER Working Paper.
  6. Floden, Martin and Jesper Linde. 2001. "Idiosyncratic Risk in the U.S. and Sweden: Is There a Role for Government Insurance?" Review of Economic Dynamics, 4: 406-437. https://doi.org/10.1006/redy.2000.0121
  7. Guerrieri, Veronica and Guido Lorenzoni. 2017. "Credit crises, precautionary savings, and the liquidity trap," The Quarterly Journal of Economics, 132(3): 1427-1467. https://doi.org/10.1093/qje/qjx005
  8. Guerrieri, Veronica, Guido Lorenzoni, Ludwig Straub, and Ivan Werning. 2020. "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?" NBER Working Paper.
  9. Kaplan, Greg, Benjamin Moll, and Giovanni L. Violante. 2020. "The great lockdown and the big stimulus: Tracing the pandemic possibility frontier for the US," NBER Working Paper.
  10. Krueger, Dirk, Harald Uhlig, and Taojun Xie. 2020. "Macroeconomic Dynamics and Reallocation in an Epidemic," NBER Working Paper.
  11. Moll, Benjamin. 2021 (https://benjaminmoll.com/codes/, Last Access Date: 2021. 3. 19).
  12. World Health Organization. (https://covid19.who.int/, Last Access Date: 2021. 3. 23).