Income Risk and the Benets of Social Insurance: Evidence from Indonesia and the United States

This paper examines the welfare consequences of social safety nets in developing economies relative to developed economies. Using panel surveys of households in Indonesia and the United States, we …nd that food consumption falls by approximately ten percent when individuals become unemployed in both countries. This …nding suggests that introducing a formal social insurance program would have small bene…ts in terms of reducing consumption ‡uctuations in Indonesia. However, in contrast with households in the U.S., Indonesians use costly methods such as reducing human capital investment to smooth consumption. The primary bene…t of social insurance in developing countries may therefore come not from consumption smoothing itself but from reducing the use of ine¢ cient smoothing methods. Keywords: liquidity constraints, consumption smoothing, unemployment E-mails: [email protected], [email protected]. This paper was prepared for the 2005 NBER East Asian Seminar on Economics. We have bene…ted from comments by Pranab Bardhan, Roger Gordon, Mario Lamberte, Ted Miguel, anonymous referees, and conference participants. James Sly and Bhuvan Jain provided excellent research assistance. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research sta¤ or the Board of Governors of the Federal Reserve.