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Household Responses to Individual Shocks: Disability, Labour Supply

Author

Listed:
  • Laura Turner

    (University of Toronto)

  • Giovanni Gallipoli

    (University of British Columbia)

Abstract

What are idiosyncratic shocks and how do people react to them? This paper starts from the observation that idiosyncratic shocks are experienced at the individual level, while responses to shocks can encompass the whole household. Understanding and accurately modeling these responses is essential to the analysis of intra-household allocations, especially labor supply. Using longitudinal data from the `Canadian Survey of Labor and Income Dynamics' (SLID) we exploit information about disability and health status to develop a life-cycle framework which rationalizes observed responses of household members to idiosyncratic shocks. Two puzzling findings associated to disability onset motivate our work: (1) the almost complete absence of `added worker' effects within households and, (2) the fact that single agents' labor supply responses to disability shocks are larger and more persistent than those of married agents. We show that a first-pass, basic model of the household has predictions about dynamic labor supply responses which are at odds with these facts; despite such failure, we argue that these facts are consistent with optimal household behavior when we account for two simple mechanisms: the first mechanism relates to selection into and out of marriage, while the second hinges on insurance transfers taking place within households. We show that these mechanisms arise naturally when we allow for three features: a linkage between human capital accumulation and life-cycle labor supply, endogenous marriage contracts and the possibility of time transfers between partners. We also provide evidence that our extended model with endogenous marriage contracts can fit divorce patterns observed in Canadian data, as well as correlations between disability prevalence and marital status, providing an ideal framework to study intra-household risk-sharing with limited commitment.

Suggested Citation

  • Laura Turner & Giovanni Gallipoli, 2010. "Household Responses to Individual Shocks: Disability, Labour Supply," 2010 Meeting Papers 110, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:110
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jochen Mankart & Rigas Oikonomou, 2017. "Household Search and the Aggregate Labour Market," Review of Economic Studies, Oxford University Press, vol. 84(4), pages 1735-1788.
    2. Hamish Low & Luigi Pistaferri, 2010. "Disability Risk, Disability Insurance and Life Cycle Behavior," NBER Working Papers 15962, National Bureau of Economic Research, Inc.
    3. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 255-326.
    4. repec:asb:wpaper:201216 is not listed on IDEAS
    5. Tom Krebs & Moritz Kuhn & Mark L. J. Wright, 2015. "Human Capital Risk, Contract Enforcement, and the Macroeconomy," American Economic Review, American Economic Association, vol. 105(11), pages 3223-3272, November.
    6. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2013. "Education Policy and Intergenerational Transfers in Equilibrium," Working Paper series 15_13, Rimini Centre for Economic Analysis.
    7. Gianluca Violante & Giovanni Gallipoli & Costas Meghir, 2005. "Education Decisions, Equilibrium Policies and Wages Dispersion," 2005 Meeting Papers 522, Society for Economic Dynamics.
    8. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
    9. Capatina, Elena, 2015. "Life-cycle effects of health risk," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 67-88.
    10. Laura Turner & Kevin Devereux, 2014. "Risk Sharing and On-the-Marriage Search," 2014 Meeting Papers 815, Society for Economic Dynamics.
    11. Laura Turner & Aloysius Siow & Gueorgui Kambourov, 2014. "Relationship Skills in the Labor and Marriage Markets," 2014 Meeting Papers 155, Society for Economic Dynamics.
    12. Mariacristina De Nardi & Eric French & John Bailey Jones, 2015. "Couples' and Singles’ Savings After Retirement," Working Papers wp322, University of Michigan, Michigan Retirement Research Center.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • I10 - Health, Education, and Welfare - - Health - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure

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