For Better or for Worse? The Effect of Earnings Risk on Family Structure

Several of the most striking trends in family structure over recent decades plausibly represent a response to uncertainty–for instance, the rapid increases in the age at which people marry, non-marital cohabitation, and divorce. To investigate that hypothesis, this paper attempts to measure the sensitivity of family formation and dissolution decisions to a specific type of risk, earnings instability. An individual’s earnings instability is defined here as the expected standard deviation of transitory earnings shocks for a person with the individual’s demographic and occupational characteristics. Results from the PSID indicate that a one standard deviation increase in this measure of earnings risk is associated with a 70—90 percent decrease in the hazard that a single person will begin a marriage and a 25—50 percent increase in the hazard of forming a cohabitational union. These effects are 2—4 times larger than the effects of a standard deviation increase in actual earnings. However, earnings instability seems to matter little once a match is formed