Labour market policy and poverty in the US - An analysis based on Fokker-Planck equations

• Applicant: Professor Dr. Klaus Wälde
• Subject Area: Economic Theory
• Term: from 2011 to 2015
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 195713246

Poverty defined as family income below 60% of the median in a country differs a lot among G7 countries. The literature stresses that poverty is also caused by labour market transitions in general and the unemployment benefit and social security system in particular. It is the objective of this project to understand this link by developing and using innovative methods. The hypothesis will be explored using the theoretical background developed by Bayer and Wälde and Lise. Bayer and Wälde develop a model of matching and saving which allows to study the link between unemployment benefits and the distribution of wealth and income in a DSGE (dynamic stochastic general equilibrium) model. Lise also allows for endogenous wage dispersion but neglects general equilibrium considerations. To obtain quantitative results, the model by Bayer and Wälde will be solved numerically and calibrated. Calibration uses data from the US as in Lise. The numerical solution will first exploit the existence proof in Bayer and Wälde by directly solving the Keynes-Ramsey rules. We then solve the Fokker-Planck equations which describe the distribution of wealth over time. We take general equilibrium effects into account and, in the final phase, we extend the setup for a distribution of wages as in Lise.

• DFG Programme: Research Grants
• International Connection: United Kingdom
• Participating Person: Jeremy Lise