Home Production and Social Security Reform

38 Pages Posted: 17 Feb 2012

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Wenli Li

Federal Reserve Bank of Philadelphia

Fang Yang

Louisiana State University, Baton Rouge

Date Written: February 16, 2012

Abstract

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Comparing our benchmark economy to one with differentiated goods but no home production, we find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing our economy to a one-good economy without home production, we show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production.

Keywords: Home Production, Housing, Social Security Reform, Labor Supply

JEL Classification: E21, E62, H55

Suggested Citation

Dotsey, Michael and Li, Wenli and Yang, Fang, Home Production and Social Security Reform (February 16, 2012). FRB of Philadelphia Working Paper No. 12-5. Available at SSRN: https://ssrn.com/abstract=2006482 or http://dx.doi.org/10.2139/ssrn.2006482

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
804-697-8201 (Phone)
804-697-8255 (Fax)

Wenli Li

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Fang Yang

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

HOME PAGE: http://faculty.bus.lsu.edu/fyang/

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