Does Redistribution Increase Output? The Centrality of Labor Supply
42 Pages Posted: 7 Mar 2014 Last revised: 14 May 2015
Date Written: February 28, 2014
The aftermath of the recent recession has seen calls to use transfers to poorer households as a means to enhance aggregate economic activity. The goal of this paper is to study the effects of wealth redistribution from rich to poor households on consumption and output in the short run. We first demonstrate analytically how the direction and size of the output effects of such interventions depends on labor supply decisions. We then show that in a standard incomplete-markets model extended to allow for nominal rigidities and parametrized to match the U.S. wealth distribution, wealth redistribution does lead to a temporary boom in consumption but not in output.
Keywords: Multipliers, Redistribution, Labor supply, Idiosyncratic Risk
JEL Classification: D90, E21, E25, E63
Suggested Citation: Suggested Citation