Self insurance and public employment programs

The paper studies the labor allocation decision by households faced with non-insurable labor income risks and establishes a case for a government sponsored public employment program as a provider of self-insurance to such households. We study the equilibria of a two period general equilibrium model with incomplete markets and two types of firms - a privately owned one offering a risky wage contract and a public works program offering a relatively riskfree one. We show that the employment level in the public program is higher in our model economy compared to that in a benchmark complete markets economy.