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

Author/Editor: Mercedes Garcia-Escribano
Publication Date: February 01, 2004
Electronic Access: Free Full text (PDF file size is 420KB).
Use the free Adobe Acrobat Reader to view this PDF file

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(s): Consumption

Author's Keyword(s): Female labor supply | spousal labor participation | consumption smoothing | liquidity constraints
Publication Date: February 01, 2004
ISBN/ISSN: 9781451843873/1018-5941 Format: Paper
Stock No: WPIEA0202004 Pages: 42
US$15.00 (Academic Rate:
US$15.00 )
Please address any questions about this title to