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Spousal Labor Supply Response to Job Displacement and Implications for Optimal Transfers

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Abstract

I document a small spousal earnings response to the job displacement of the family head. The response is even smaller in recessions, when earnings losses are larger and additional insurance is valuable. Using cross-state differences in transfer generosity, I find that generous transfers substantially crowd out the spousal earnings response. To study its policy implications, I develop an incomplete markets model with family labor supply and aggregate fluctuations, where predicted labor supply elasticities to taxes and transfers are in line with empirical estimates both in aggregate and across income groups. Counterfactual experiments indeed reveal that generous transfers in recessions discourage spousal earnings. I show that the optimal policy features procyclical means-tested and countercyclical employment-tested transfers, unlike the existing policy that maintains generous transfers of both types in recessions. Abstracting from the incentive costs of transfers on the spousal labor supply changes both the level and the cyclicality of optimal transfers.

Suggested Citation

  • Serdar Birinci, 2019. "Spousal Labor Supply Response to Job Displacement and Implications for Optimal Transfers," Working Papers 2019-020, Federal Reserve Bank of St. Louis, revised 25 Sep 2021.
  • Handle: RePEc:fip:fedlwp:88548
    DOI: 10.20955/wp.2019.020
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    Cited by:

    1. Titan Alon & Matthias Doepke & Jane Olmstead-Rumsey, 2020. "This Time It's Different: The Role of Women's Employment in a Pandemic Recession," Working Papers 2020-057, Human Capital and Economic Opportunity Working Group.
    2. Daniel Fackler & Eva Weigt, 2020. "Who Buffers Income Losses after Job Displacement? The Role of Alternative Income Sources, the Family, and the State," LABOUR, CEIS, vol. 34(3), pages 239-276, September.
    3. Birinci, Serdar & Karahan, Fatih & Mercan, Yusuf & See, Kurt, 2021. "Labor market policies during an epidemic," Journal of Public Economics, Elsevier, vol. 194(C).
    4. Guner, Nezih & Kulikova, Yuliya & Valladares-Esteban, Arnau, 2020. "Does the Added Worker Effect Matter?," IZA Discussion Papers 12923, Institute of Labor Economics (IZA).
    5. Benjamin S. Griffy, 2021. "Search And The Sources Of Life‐Cycle Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1321-1362, November.

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    More about this item

    Keywords

    Unemployment; Business Cycles; Fiscal Policy and Household Behavior; Job Search;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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