Can Safety Nets Offset the Impact of Risk on Wage Inequality and Social Welfare?

Income variablity reduces social welfare if individuals are risk averse, and it is likely to increase inequality if poorer households are more vulnerable to shocks. Using a simple method to estimate risk-adjusted measures of inequality and welfare and wage data from Mexico, this note shows that it is easier for safety nets to offset the impact of risk on wage inequality than on welfare. This is because apart from its impact on inequality, risk reduces the certainty equivalent income of individuals.