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Household Responses to Individual Shocks: Disability and Labor Supply

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  • Giovanni Gallipoli

    (University of British Columbia, Canada The Rimini Centre for Economic Analysis, Rimini, Italy)

  • Laura Turner

    (University of British Columbia, Canada The Rimini Centre for Economic Analysis, Rimini, Italy)

Abstract

What are idiosyncratic shocks and how do people respond to them? This paper starts from the observation that idiosyncratic shocks are experienced at the individual level, but 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 Labour 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 report evidence that the 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

  • Giovanni Gallipoli & Laura Turner, 2009. "Household Responses to Individual Shocks: Disability and Labor Supply," Working Paper series 04_09, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:04_09
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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. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 97(3Q), pages 255-326.
    3. Hamish Low & Luigi Pistaferri, 2020. "Disability Insurance: Theoretical Trade‐Offs and Empirical Evidence," Fiscal Studies, John Wiley & Sons, vol. 41(1), pages 129-164, March.
    4. repec:asb:wpaper:201216 is not listed on IDEAS
    5. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2019. "Education Policy and Intergenerational Transfers in Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2569-2624.
    6. Parro, Francisco & Pohl, R. Vincent, 2018. "Health Shocks, Human Capital, and Labor Market Outcomes," MPRA Paper 87238, University Library of Munich, Germany.
    7. Eleftherios Giovanis & Oznur Ozdamar, 2018. "Empirical Application of Collective Household Labour Supply Model in Iraq," Working Papers 1180, Economic Research Forum, revised 19 Apr 2018.
    8. Rigas OIKONOMOU & Christian SIEGEL, 2015. "Capital Taxes, Labor Taxes and the Household," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 81(3), pages 217-260, September.
    9. Giovanni Gallipoli & Brant Abbott, 2017. ""Permanent Income" Inequality," 2017 Meeting Papers 1033, Society for Economic Dynamics.
    10. Gianluca Violante & Giovanni Gallipoli & Costas Meghir, 2005. "Education Decisions, Equilibrium Policies and Wages Dispersion," 2005 Meeting Papers 522, Society for Economic Dynamics.
    11. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
    12. 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.
    13. Laura Turner & Kevin Devereux, 2014. "Risk Sharing and On-the-Marriage Search," 2014 Meeting Papers 815, Society for Economic Dynamics.
    14. Laura Turner & Aloysius Siow & Gueorgui Kambourov, 2014. "Relationship Skills in the Labor and Marriage Markets," 2014 Meeting Papers 155, Society for Economic Dynamics.
    15. Lee, Siha, 2020. "Household responses to disability shocks: Spousal labor supply, caregiving, and disability insurance," CLEF Working Paper Series 21, Canadian Labour Economics Forum (CLEF), University of Waterloo.
    16. Siha Lee, 2020. "Spousal Labor Supply, Caregiving, and the Value of Disability Insurance," Department of Economics Working Papers 2020-08, McMaster University.
    17. 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.
    18. Eleftherios Giovanis & Oznur Ozdamar, 2019. "A Collective Household Labour Supply Model with Disability: Evidence from Iraq," Journal of Family and Economic Issues, Springer, vol. 40(2), pages 209-225, June.
    19. Capatina, Elena, 2015. "Life-cycle effects of health risk," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 67-88.
    20. Shaun Grech, 2019. "Disabled Families: The Impacts of Disability and Care on Family Labour and Poverty in Rural Guatemala," Societies, MDPI, Open Access Journal, vol. 9(4), pages 1-16, November.

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    More about this item

    Keywords

    tourism specialisation; economic growth; developing countries;
    All these keywords.

    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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