For Better, for Worse: Intra-household Risk-sharing over the Business Cycle
For Better, for Worse: Intra-household Risk-sharing over the Business Cycle
Paper Abstract
How do the financial benefits of marriage vary with macroeconomic conditions?
One of the major benefits of marriage is the ability to dynamically coordinate labor
supply decisions in response to shocks. When one spouse loses a job, the other can work
more. This paper argues that dynamic coordination is countercyclical; the innovations to
husbands' and wives' labor incomes are more positively correlated when the economy is
growing rapidly. As a result, while individuals face substantially more idiosyncratic
labor income risk in bad times than good, households do not. Improved intra-household
coordination in bad times nearly or completely undoes for couples the increased riskiness
that comes to individuals.
Since panel datasets are typically too short to capture more than a few business
cycles, I exploit variation in the cross-sectional covariance of husbands and wives
incomes to infer the covariance of past innovations to their incomes. Couples who have
been married through periods of greater economic expansion have more positively
correlated labor incomes in the cross-section, after controlling for a time trend in
assortative mating. This implies that the correlation of couples' labor incomes falls by
roughly 20 percent (e.g., from 10 percent to -10 percent) from booms to busts.
One of the major benefits of marriage is the ability to dynamically coordinate labor
supply decisions in response to shocks. When one spouse loses a job, the other can work
more. This paper argues that dynamic coordination is countercyclical; the innovations to
husbands' and wives' labor incomes are more positively correlated when the economy is
growing rapidly. As a result, while individuals face substantially more idiosyncratic
labor income risk in bad times than good, households do not. Improved intra-household
coordination in bad times nearly or completely undoes for couples the increased riskiness
that comes to individuals.
Since panel datasets are typically too short to capture more than a few business
cycles, I exploit variation in the cross-sectional covariance of husbands and wives
incomes to infer the covariance of past innovations to their incomes. Couples who have
been married through periods of greater economic expansion have more positively
correlated labor incomes in the cross-section, after controlling for a time trend in
assortative mating. This implies that the correlation of couples' labor incomes falls by
roughly 20 percent (e.g., from 10 percent to -10 percent) from booms to busts.