Wage shocks,household labor supply,and income instability

Do married couples make joint labor supply decisions in response to each other’s wage shocks? The study on this question aids in understanding the link between the rising income instability and household insurance. Existing studies on household insurance either focus on consumption smoothing and take labor supply as a given, or only focus on wife’s labor responses to husband’s unemployment shocks. This article develops an intra-household insurance model that allows for insurance against permanent and transitory wage shocks from both partners. Estimation using the Survey of Income and Program Participation shows that wife increases labor supply in response to husband’s adverse wage shocks when both of them are working, and wife gets more nonlabor income when she is out of work. This intra-household insurance reduces earnings instability by about 2 to 9 %. These results suggest that joint labor supply decisions provide an extra smoothing effect on income instability.