Andrea Weber, Vienna University of Economics – Københavns Universitet

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Andrea Weber, Vienna University of Economics

"Job Displacement, Family Dynamics and Spousal Labor Supply "

Abstract

This paper studies interdependencies in spousal labor supply and provides new empirical evidence on the added worker effect. We focus on married couples in which the husband loses his job due to a mass layoff or plant closure using data from the Austrian Social Security Database. The couples in our sample are relatively young and the shock hits households at crucial stages of family formation. To capture the high volatility in wives' pre-displacement labor market careers due to child birth and parental leave, we examine three quasi-experimental counterfactual scenarios that are potentially affected by different types of selection on unobservables. Our analysis shows that husbands' and wives' labor market responses are remarkably consistent across all three scenarios and leads to four main conclusions. First, while husbands suffer large and persistent employment and earnings losses over the first 5 years after displacement, wives' labor supply increases only moderately but persistently. Second, wives respond predominantly at the extensive margin.

The implied participation elasticity with respect to the husband's earnings shock is small, about 0.05 in the full sample and 0.08 in the sample of wives not employed at displacement. Third, the effect of wives' labor supply responses on household income is negligible compared to the effects of unemployment insurance, which dampens especially the large initial earnings shock from job displacement. Fourth, female labor supply response varies by the age of children. Especially, mothers with very young children are reluctant to enter the labor force. A plausible explanation for the limited spousal labor response to large household income shocks are gender identity norms.