Spousal Labor Supply, Caregiving, and the Value of Disability Insurance

For married couples, spousal labor supply can act as a household insurance mechanism against one spouse’s earnings shock. This paper examines married women’s time allocation to market hours and spousal care in the event of their husbands’ disability and its implications for evaluating the insurance value of the Social Security Disability Insurance (SSDI) program. Using an event study approach, I find that while there is a sizable increase in wives’ working hours after their husbands’ job displacement, wives’ labor supply responses to their husbands’ disability are small, and instead, a considerable amount of time is spent in spousal care. I develop and estimate a dynamic model of married households and find that incorporating time loss due to spousal care increases the insurance value of SSDI relative to its costs. Furthermore, budget-neutral policy reforms that subsidize the cost of care can improve social welfare.