Consumption Insurance against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation

We show that a calibrated life cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri, Saporta-Eksten (2016) in US data. In model, 35 percent 18 permanent wage pass through consumption, compared empirical estimates 32 19 percent. Most is provided presence response earner. Abstracting from this private intrahousehold income mechanism strongly biases upward welfare losses idiosyncratic risk well desired public progressive taxation. Relative standard one-earner optimal degree tax progressivity significantly lower gains implementing system are cut roughly half. (JEL D15, H21, H24, J16, J22, J31)