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Spousal Labor Response to Primary Income: Identification and Heterogeneity

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Abstract

We present a new estimate for the elasticity of spousal labor supply in response to changes in the primary worker's income, the so-called "added worker effect." By leveraging firm-side information of the primary worker as an instrument, we isolate income changes that are uncorrelated with the spouse's productivity, addressing endogeneity bias. We find an economically meaningful role for the spousal labor supply, especially among young households with limited financial assets. We construct a heterogeneous agent model consistent with the estimated spousal employment response to design a government transfer program that effectively mitigates the negative income shock.

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  • Yongsung Chang & Elin Halvorsen & Marios Karabarbounis, 2025. "Spousal Labor Response to Primary Income: Identification and Heterogeneity," Working Paper 25-13, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:102137
    DOI: 10.21144/wp25-13
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    Keywords

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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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