General equilibrium effects of social insurance programs: long and short-run sectoral re-allocation

In the social insurance literature, the seminal work of Baily (1978) and Chetty (2006) developed sufficient statistics for welfare analysis in a partial equilibrium setting. Their work relies on a powerful application of the envelope theorem to argue that the change in savings and other behavioural responses are irrelevant for welfare, but naturally one wonders to what extent this insight survives when we get rid of the partial equilibrium assumption. Works such as McKay and Reis (2016) suggest ways in which the result may break down or be weakened in general equilibrium. They embed unemployment insurance into a GE business cycle model and find that higher replacement rates lead to lower steady state capital stock and worse overall capacity to weather aggregate shocks. Later work by Landais et al. (2018) extended the Baily-Chetty formula to account for general equilibrium effects via labour market tightness in a matching model, but there are other extensions that could be considered. For instance, it is not implausible to think that unemployment insurance could affect the allocation of workers across industries if there are systematic differences in the volatility of output and employment across sectors, or that it could interact with sectoral adjustments during recessions. These subtler forms of moral hazard are probably harder to identify empirically, but some kinds of policy variation could get at them. As a preliminary idea, in Spain there are regional and sectoral differences in unemployment insurance in the form of a special, more generous regime for agricultural workers in Andalusia and Extremadura, called PER / PFEA. A differences-in-differences research design could potentially identify the effects of this policy on the share of agricultural employment. This is admittedly a narrower context than the one to which I referred earlier, but the exercise could be instructive about the scope for general social insurance to induce similar allocative effects at a macroeconomic scale.