Spousal Labor Supply Response to Job Displacement and Implications for Optimal Transfers

RePEc Short ID: pbi318
ORCID iD: 0000-0001-7323-1932

Birinci, Serdar

doi:10.20955/wp.2019.020

Working Paper

Spousal Labor Supply Response to Job Displacement and Implications for Optimal Transfers

Abstract: I document a small spousal earnings response to the job displacement of the family head. The response is even smaller in recessions, when additional insurance is most valuable. I investigate whether the small response is an outcome of the crowding-out effects of existing government transfers, using a model where labor supply elasticities with respect to transfers are in line with microeconomic estimates both in aggregate and across subpopulations. Counterfactual experiments reveal that generous transfers in recessions discourage the spousal labor supply significantly. I then show that the optimal policy features procyclical means-tested and countercyclical employment-tested transfers, unlike the existing policy.

Keywords: Fiscal Policy and Household Behavior; Business Cycles; Job Search; Unemployment;

JEL Classification: E24; E32; H31; J64;

https://doi.org/10.20955/wp.2019.020