Uninsured Risk, Stagnation, and Fiscal Policy

R. Anton Braun and Tomoyuki Nakajima

Working Paper 2016-4a
Revised March 2016 (Original February 2016)

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Japan is in the midst of a protracted spell of depressed economic activity. Japan's economic stagnation has occurred against a background of rising earnings risk. Occupational stability is falling as routine occupations disappear and implicit lifetime employment guarantees are gradually disappearing. At the same time, earnings in some high-skilled occupations have continued to grow. The resulting polarization in earnings has also been accompanied by an increase in wealth inequality. We develop a framework that relates these observations. In our model, an increase in uninsured earnings risk depresses output and increases wealth inequality. We then analyze the efficacy of alternative fiscal measures in terms of their ability to increase economic activity, reduce wealth inequality, and improve welfare. We find that a lower tax rate on capital achieves all of these objectives.

JEL classification: E13, E16, D31

Key words: economic stagnation, wage polarization, wealth inequality

The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to R. Anton Braun, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8708, r.anton.braun@gmail.com, or Tomoyuki Nakajima, Institute of Economic Research, Kyoto University, and the Canon Institute for Global Studies, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan, nakajima@kier.kyoto-u.ac.jp.
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