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Does Spousal Labor Smooth Fluctuations in Husbands' Earnings? the Role of Liquidity Constraints

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  • Mercedes Garcia-Escribano
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    Abstract

    This paper theoretically and empirically investigates the role of spousal labor in buffering transitory shocks to husbands'' earnings. To measure the amount of the shock that spousal labor absorbs, an instrumented cross-sectional variance decomposition is developed. Using data from the Panel Study of Income Dynamics, the paper finds that the smoothing resulting from the wives'' labor response (both labor force participation and hours of work) is larger for households with limited access to credit. This finding, which is consistent with the model''s prediction, indicates that because of the presence of liquidity constraints, the temporal change in family income (exclusive of wives'' earnings) reinforces the substitution effect in explaining the effect of shocks to the husbands'' earnings on spousal labor.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/20.

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    Length: 42
    Date of creation: 01 Feb 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/20

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    Related research

    Keywords: Economic models; labor supply; labor market; labor force; equation; independent variable; labor force participation; sample selection; equations; survey; instrumental variables; standard errors; markov chain; labor economics; covariance; statistics; standard deviation; descriptive statistics; instrumental variable; stochastic process; computation; outliers; labor market information; predictions; regression analysis; prediction; labor earning; labor market characteristics; labor market transition; missing data; labor market participant; dummy variables; sample size; functional forms; dummy variable; standard deviations;

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    1. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 192-205, March.
    2. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    3. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
    4. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 18(3), pages 546-72, July.
    5. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-88, Wharton School Rodney L. White Center for Financial Research.
    6. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
    7. Orley Ashenfelter, 1977. "Unemployment as Disequilibrium in a Model of Aggregate Labor Supply," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 484, Princeton University, Department of Economics, Industrial Relations Section..
    8. Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 50-68, March.
    9. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
    10. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 3(1), pages 11-37, January.
    11. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Katrin Elborgh-Woytek & Monique Newiak & Kalpana Kochhar & Stefania Fabrizio & Kangni Kpodar & Philippe Wingender & Benedict J. Clements & Gerd Schwartz, 2013. "Women, Work, and the Economy:Macroeconomic Gains from Gender Equity," IMF Staff Discussion Notes 13/10, International Monetary Fund.

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