IDEAS home Printed from
   My bibliography  Save this paper

Family job search and consumption: the added worker effect revisited


  • J. Ignacio Garcia-Perez
  • Silvio Rendon


In this paper we find out the determinants of consumption variations depending on the employment transitions experienced by household members. We set up a utility-maximizing household search model in which consumption and job search decisions are made jointly. Families determine a level of consumption, who has to work, and what is the minimum acceptable wage for each family member. This interaction implies that each member’s reservation wage is highly dependent not only on the partner’s labor market status but also on his/her wage. As in other job search models, the labor market environment of each household member is stochastic: both employed and unemployed agents receive job offers arriving randomly from a known wage offer distribution. Employed agents face the risk of being laid off from their current job. We assume that labor market environments of the household members are unconnected. However, assets and consumption are common to the household, which links the household members’ employment decisions. The household’s problem can be summarized in four value functions: both members unemployed, husband unemployed and wife employed, husband employed and wife unemployed, and, finally, both members employed. The expected discounted utility of the household differs according to the current employment states, asset holdings, and wages of its members. The solution to this model is contained in policy rules for consumption, or assets, and reservation wages for each employment status. It can be proved that consumption is increasing in assets and in wages for all employment status. Finally, reservation wages emerge from comparing the different value functions. We define two different reservation wages for each member, one when the partner is unemployed and another one when the partner is employed. In this model, not only wealth but also the employment status of the partner allows agents to be more selective and search longer. If the partner becomes unemployed, an agent cannot afford to be so selective and he/she has to accept lower wage offers. The model allows, thus, for the traditional “added worker effect†, if a household member becomes unemployed. Moreover, we show that reservation wages describe an inverted U in the partner’s wage. This effect, which we name “the new added worker effect†, is more important the higher is the wealth of the household. The intuition behind this effect is the following: when an agent is unemployed and looks for jobs, he/she is initially more selective the higher is the wage of the partner because the income effect of the partner’s wage dominates. However, when the wage of the partner is high enough, given the risk of being laid off, the household as a decision unit considers that the way to reduce the risk of losing the income necessary to maintain consumption is to have both members employed. Hence, there is a critical value where the reservation wage of the unemployed partner begins to decrease with the partner’s wage. Using the Spanish Continuous Family Expenditure Survey (ECPF) for the period 1985-1996, we estimate the behavioral parameters of the theoretical model for a sample of Spanish households. We use the policy rules of the dynamic programming problem to construct the likelihood function of our observed data. By maximizing the likelihood function, we recover those parameters that explain the relationship between consumption and employment status within the household. With the results of this estimation, we simulate some policy experiments. In particular we are interested on how the Unemployment Benefits system affects intra-household decisions.

Suggested Citation

  • J. Ignacio Garcia-Perez & Silvio Rendon, 2004. "Family job search and consumption: the added worker effect revisited," 2004 Meeting Papers 518, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:518

    Download full text from publisher

    File URL:
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    1. David Domeij & Martin Flodén, 2006. "Population Aging And International Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 1013-1032, August.
    2. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-1185, July.
    3. repec:adr:anecst:y:1990:i:17 is not listed on IDEAS
    4. Judd, Kenneth L., 2002. "The parametric path method: an alternative to Fair-Taylor and L-B-J for solving perfect foresight models," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1557-1583, August.
    5. Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1291-1318, August.
    6. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    7. repec:adr:anecst:y:1990:i:17:p:04 is not listed on IDEAS
    8. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 711-734, May.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Guler, Bulent & Guvenen, Fatih & Violante, Giovanni L., 2012. "Joint-search theory: New opportunities and new frictions," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 352-369.
    2. Daniela Del Boca & Christopher J. Flinn, 2005. "Household Time Allocation and Modes of Behavior: A Theory of Sorts," CHILD Working Papers wp15_05, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    3. Dey, Matthew & Flinn, Christopher, 2008. "Household search and health insurance coverage," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 43-63, July.
    4. Stefania Marcassa, 2014. "Unemployment Duration of Spouses: Evidence From France," LABOUR, CEIS, vol. 28(4), pages 399-429, December.

    More about this item


    job search; asset accumulation; household economics; estimation of dynamics structural models;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed004:518. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.