Risk Sharing Or Bargaining?: The Impact of Spousal Labor Supply on Unemployment Duration

Comments are welcome. This paper theoretically studies and empirically estimates (1) how spousal labor supply affects bargaining between the husband and wife over their private consumption, and (2) the impact of this intrahousehold bargaining on their reservation wage and unemployment duration. We consider a model of household job search in which the outcomes of bargaining are determined by the sharing rule of Chiappori (1992), a function defining the dependency of couples ’ private consumption on their labor market conditions. This model allows the husband and wife to rationally expect their share of household income and decide on labor supply recursively. Using the panel data of SIPP 20011, this work finds that the private consumption of the unemployed husband shrinks to 85 % of that of the employed husband in the U.S., indicating that employment is crucial in the husband ’ bargaining with his spouse. The estimates have two main implications. First, it suggests asymmetry in household unemployment duration: the more the husband earns, the longer the wife searches for a job; whereas the more the wife earns, the sooner the husband finds a job. Secondly, an increase of $100 in unemployment insurance (UI) per month lowers employment rate of the wife by 0.46% with an employed husband, compared to 3.35 % of that with a unemployed husband, suggesting UI benefits crowd out the added worker effect (AWE)