AN EXPLORATORY COMPARISON OF INCOME RISK IN GERMANY AND THE UNITED-STATES

Using longitudinal data, I estimate the impact of redistribution on th e welfare cost of income risk in Germany and the United States. The es timates account fully for behavior because individuals in each country have responded optimally to that country's policy. The results indica te that the welfare cost of income risk is 5.4 percent of disposable i ncome in Germany, 8.5 percent in the U.S. Redistribution has reduced t hese risks from their pre-tax, pre-transfer levels by 43 percent in Ge rmany, 21 percent in the U.S. The political importance of income secur ity is evident in both countries, as risk relief often eliminates the net burden of redistributive taxes among middle-class households. The conclusions are robust across several models of income expectations.