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

Serdar Birinci

No 2019-020, Working Papers from Federal Reserve Bank of St. Louis

Abstract: I document a small spousal earnings response to the job displacement of the family head. The response is even smaller in recessions, when earnings losses are larger and additional insurance is valuable. Using cross-state differences in transfer generosity, I find that generous transfers substantially crowd out the spousal earnings response. To study its policy implications, I develop an incomplete markets model with family labor supply and aggregate fluctuations, where predicted labor supply elasticities to taxes and transfers are in line with empirical estimates both in aggregate and across income groups. Counterfactual experiments indeed reveal that generous transfers in recessions discourage spousal earnings. I show that the optimal policy features procyclical means-tested and countercyclical employment-tested transfers, unlike the existing policy that maintains generous transfers of both types in recessions. Abstracting from the incentive costs of transfers on the spousal labor supply changes both the level and the cyclicality of optimal transfers.

Keywords: unemployment; business cycles; fiscal policy; household behavior; job search (search for similar items in EconPapers)
JEL-codes: E24 E32 H31 J64 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2019-09, Revised 2024-01
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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DOI: 10.20955/wp.2019.020

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