Events at CERGE-EI

Marios Karabarbounis, Ph.D.

Federal Reserve Bank of Richmond

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Meeting number: 2744 507 7362
Meeting password: 285430

Authors: Marios Karabarbounis, Yongsung Chang and Elin Halvorsen

Abstract: Based on administrative data from Statistics Norway, we provide a new estimate of the elasticity of spousal labor supply in response to changes in the household's primary worker's income: the so-called "added worker effect." Our estimation uses the sales revenue of the primary worker's employer as an instrument to isolate primary income shifts that are orthogonal to spouse's productivity and persistent over time, both key properties to mitigate the attenuation bias typically present in empirical studies. We find an economically meaningful and statistically significant role for the spousal labor supply, especially among young, hand-to-mouth households. We show that a heterogeneous agent model with dual labor supply calibrated to the Norwegian economy successfully reproduces our empirical estimates. Using our model, we evaluate the welfare implications of various government subsidies designed to mitigate the effects of unexpected income shocks.