Alisdair McKay, Boston University: The Automatic Stabilizer Property of Social Insurance Programs

Department seminar. Alisdair McKay is assistant professor at Boston University. He will present a paper entitled "The Automatic Stabilizer Property of Social Insurance Programs", written jointly with Ricardo Reis.

Alisdair McKay

Alisdair McKay. Photo: Boston University.

Abstract:

Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment bene ts replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax. More generally, the role of social insurance programs as automatic stabilizers affects their optimal design.

Hosts: Andreas Müller, Marcus Hagedorn

Published Feb. 17, 2016 10:45 AM - Last modified Aug. 6, 2021 10:00 AM