Rocio Madera, SMU
"Assortative Mating and Income Dynamics of Couples"
In households of two (potential) earners, the second earner can act as an important insurance channel against individual income risk. While this is agreed upon, there is no consensus on the size of this spousal insurance. In this paper, we document a large amount of heterogeneity in income co-variation of partners and show how this heterogeneity is systematically related to observable joint characteristics of couples—including age, wealth, and various measures of sorting in the labor market. In particular, we use tax register data on the full Danish population to analyze the relationship between marital sorting and the joint income dynamics of spouses. We find, first, that spouses are sorted along various dimensions, including education, career, and employer. Second, spouses that are similar along these dimensions display stronger co-movement of their annual incomes. This is consistent with the notion that the scope of spousal adjustments in response to labor income shocks of the partner is limited by the extent to which both face correlated labor market risk; e.g., spouses working in the same occupation provide worse insurance because they are exposed to the same occupation-level risk. We further provide evidence that the uncovered heterogeneity across couples translates into systematic variation in household consumption, which is a crucial driver of household-level reactions to, e.g., fiscal policy in the form of transfer payments. Finally, we consider a standard joint income process for two earners allowing for correlation of the innovations received by both earners. We find that the empirical sorting patterns translate into a stronger correlation of the permanent components of each spouse's individual earnings.
Contact person: Laura Sunder-Plassmann