Thesis advisor: Peter Gottschalk / Thesis advisor: Shannon Seitz / This dissertation contains two essays in labor economics. It provides a descriptive analysis on income volatility and develops a microeconomic model to study how married couples make joint decisions in response to such income volatility. The first essay examines the recent trends in household income volatility in the United States, West Germany and Great Britain, and compares household income volatility with individual income volatility. I estimate a formal error components model using the Cross-national Equivalence File from 1979 to 2004. I find that household income volatility, measured by the transitory variance of household income, accounts for more than half of the total income variance for all three countries. Despite the differences in the total household income variances among the three countries, the permanent variances converges since the late 1990s. The household earnings volatility is always lower than the individual earnings volatility for married couples, which suggests some evidence of intra-household insurance. In the second essay I examine whether married couples make joint labor supply decisions in response to each other's wage shocks. The study of this question aids in understanding the link between the recent rise in earnings volatility and household joint decisions. I develop an intra-household insurance model based on the collective framework, which allows for insurance against both permanent and transitory wage shocks from both partners. Estimation using Survey of Income and Program Participation shows that individuals increase labor supply in response to spouse's adverse wage shocks and such labor supply responses are larger when shocks are permanent than transitory. A household makes less transfer to the individual with more volatile income, which can be considered as a price for insurance.This intra-household insurance reduces earnings volatility by about 1.2% to 7.7%. These results suggest that joint labor supply decisions provide a smoothing effect on shocks to earnings and household income. / Thesis (PhD) — Boston College, 2009. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

We study the effectiveness of intra-household insurance among married couples when the husband loses his job due to a mass layoff or plant closure. Empirical results based on Austrian administrative data show that husbands suffer persistent employment and earnings losses, while wives' labor supply increases moderately due to extensive margin responses. Wives' earnings gains recover only a tiny fraction of the household income loss and, in the short-term, public transfers and taxes are a more important form of insurance. We show that the presence of children in the household is a crucial determinant of the wives' labor supply response.

We study interdependencies in spousal labor supply and the effectiveness of intrahousehold insurance in a sample of married couples, where the husband loses his job due to a mass layoff or plant closure using data from the Austrian Social Security Database. We show that in our sample of relatively young couples the shock hits households at crucial stages of family formation, which requires careful modeling of the wives' counterfactual lifecycle labor market patterns. In our empirical analysis, we propose three independent control groups of unaffected households to identify the causal effects of husbands' displacement on wives' labor supply. Our empirical results show that husbands suffer large and persistent employment and earnings losses over the first 5 years after displacement. But wives' labor supply increases only moderately and they respond predominantly at the extensive margin. The implied participation elasticity with respect to the husband's earnings shock is very small, about -0:04. While the wives' earnings gains recover only a tiny fraction of the household income loss, public transfers and taxes are a more important insurance at least in the short run. In terms of non-labor market related outcomes, we find a small positive effect on the probability of divorce, but no effect of the husband's job displacement on fertility. The presence and ages of children in the household are crucial determinants of the wife's labor supply response. The most responsive group are mothers, who are planning to return to the labor market after a maternity break, while mothers of very young children or wives without children remain unresponsive. We thus conclude that Austria's strong gender identity norms are an explanation for the limited scope of intra-household insurance.