Does Spousal Labor Smooth Fluctuations in Husbands’ Earnings? The Role of Liquidity Constraints

Author/Editor:

Mercedes Garcia-Escribano

Publication Date:

February 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper theoretically and empirically investigates the role of spousal labor in buffering transitory shocks to husbands' earnings. To measure the amount of the shock that spousal labor absorbs, an instrumented cross-sectional variance decomposition is developed. Using data from the Panel Study of Income Dynamics, the paper finds that the smoothing resulting from the wives' labor response (both labor force participation and hours of work) is larger for households with limited access to credit. This finding, which is consistent with the model's prediction, indicates that because of the presence of liquidity constraints, the temporal change in family income (exclusive of wives' earnings) reinforces the substitution effect in explaining the effect of shocks to the husbands' earnings on spousal labor.

Series:

Working Paper No. 04/20

Subject:

English

Publication Date:

February 1, 2004

ISBN/ISSN:

9781451843873/1018-5941

Stock No:

WPIEA0202004

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

42

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