Family labor supply, precautionary behavior, aggregate saving and employment

Santos Monteiro, Paulo (2005): Family labor supply, precautionary behavior, aggregate saving and employment.

Abstract

I study the impact of idiosyncratic earnings uncertainty on aggregate saving and employment in an economy populated by families consisting of two members. Families incur a fixed cost of participation when both members are employed. I argue that, because of market incompleteness and private information, the presence of this fixed cost can generate multiplicity of equilibrium. In particular there might be one equilibrium with high (female) employment and low savings and another one with low employment and high savings. The model suggests that aggregate saving and employment rates should be negatively correlated across countries. Finally, I present empirical evidence that supports both the partial and the general equilibrium predictions of the model.

• Item Type: MPRA Paper
• Institution: Université Libre de Bruxelles
• Language: English
• Keywords: Aggregate saving; Employment; Family labor supply; Multiplicity
• Subjects: J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

References

D. Acemoglu and J. Pischki, Why do firms train? theory and evidence, The Quarterly Journal of Economics, 113 (1998), pp. 78–118.

S. R. Aiyagari, Uninsured idiosyncratic risk and aggregate saving, The Quarterly Journal of Economics, 109 (1994), pp. 659–684.

O. P. Attanasio, Consumption and saving behaviour: modelling recent trends, Fiscal Studies, 18 (1997), pp. 23–47.

G. S. Becker, Investment in human capital: A theoretical analysis, Journal of Political Economy, 70 (1962), pp. 9–49.

F. D. Blau and L. M. Kahn, Rising wage inequality and the u.s. gender gap, American Economic Review, 84 (1994), pp. 23–28.

F. D. Blau and L. M. Kahn, Wage structure and gender earnings differentials: An international comparison, Economica, 63 (1996), pp. S29–62.

F. D. Blau and L. M. Kahn, Understanding international differences in the gender pay gap, Journal of Labor Economics, 21 (2003), pp. 106–144.

R. Blundell and T. Macurdy, Labor supply: A review of alternative approaches, in Handbook of Labor Economics, vol. 3 of Handbook of Labor Economics, Elsevier, 1999, ch. 27, pp. 1559–1695.

M. C. Burda, D. S. Hamermesh, and P. Weil, The distribution of total work in the eu and us. IZA Discussion Papers, Aug 2006.

C. D. Carroll, The buffer-stock theory of saving: Some macroeconomic evidence, Brookings Papers on Economic Activity, (1992), pp. 61–135.

C. D. Carroll, Buffer-stock saving and the life cycle/permanent income hypothesis, Quarterly Journal of Economics, 112 (1997), pp. 1–56.

C. D. Carroll, Theoretical foundations of buffer stock saving. NBER Working Paper Number, Oct 2004.

C. D. Carroll and M. S. Kimball, Liquidity constraints and precautionary saving. NBER Working Paper, Oct 2001.

Y. Chang and S.-B. Kim, From individual to aggregate labor supply: A quantitative analysis based on a heterogeneous agent macroeconomy, International Economic Review, 47 (2006), pp. 1–27.

J.-O. Cho and R. Rogerson, Family labor supply and aggregate fluctuations, Journal of Monetary Economics, 21 (1988), pp. 233–245.

J. F. Cogan, Fixed costs and labor supply, Econometrica, 49 (1981), pp. 945–963. A. Deaton, Savings and liquidity constraints, Econometrica, 59 (1991), pp. 1221–48.

J. Diaz-Gimenez, V. Quadrini, and J.-V. Rios-Rull, Dimensions of inequality: facts on the u.s. distributions of earnings, income, and wealth, Quarterly Review Spr., Federal Reserve Bank of Minneapolis, 3-21, 1997.

J. J. Dolado and V. Llorens, Gender wage gaps by education in spain: Glass floors versus glass ceilings. CEPR Discussion Papers, Jan 2004.

K. E. Dynan, J. Skinner, and S. P. Zeldes, Do the rich save more?, Journal of Political Economy, 112 (2004), pp. 397–444.

S. M. Dynarski and J. Gruber, Can families smooth variable incomes?, Brookings Papers on Economic Activity, (1997).

S. Edwards, Why are saving rates so different across countries?: An international comparative analysis. NBER Working Papers, Apr 1995.

M. Floden, Labor supply and saving under uncertainty, Economic Journal,(Forthcoming).

P. Garibaldi and E. Wasmer, Equilibrium search unemployment, endogenous participation, and labor market flows, Journal of the European Economic Association, 3 (2005), pp. 851–882.

J. Geweke and M. Keane, An empirical analysis of earnings dynamics among men in the psid: 1968-1989, Journal of Econometrics, 67 (2000), pp. 296–356.

C. Gollier, The Economics of Risk and TIme, MIT Press, 1 ed., June 2001.

C. Gollier and M. S. Kimball, Methods in the classical economics of uncertainty: Charactarizing utility functions. mimeo, Aug 1994.

P. Gomme, P. Rupert, R. Rogerson, and R. Wright, The business cycle and the life cycle, NBER Macro Annual, NBER, 2004.

J. Heathcote, K. Storesletten, and G. L. Violante, The macroeconomic implications of rising wage inequality in the united states. CEPR Discussion Paper 4296, 2004.

J. Heathcote, K. Storesletten, and G. L. Violante , Insurance and opportunities: The welfare implications of rising wage dispersion. CEPR Discussion Papers, Aug 2005.

M. S. Hill, The Panel Survey of Income Dynamics, Guide to Major Social Science Data Bases, Sage Publications, 1 ed., 1992.

H. A. Hopenhhayn and J. P. Nicolini, Optimal unemployment insurance, Journal of Political Economy, 105 (1997), pp. 412–438.

D. R. Hyslop, State dependence, serial correlation and heterogeneity in intertemporal labor force participation of married women, Econometrica, 67 (1999), pp. 1255–1294.

L. E. Jones, R. E. Manuelli, and E. R. McGrattan, Why are married women working so much?, Staff Report 317, Federal Reserve Bank of Minneapolis, Jun 2003.

M. S. Kimball and M. D. Shapiro, Labor supply: Are the income and substitution e.ects both large or both small? mimeo, May 2003.

P. Krusell, A. A. Smith, and Jr., Income and wealth heterogeneity in the macroeconomy, Journal of Political Economy, 106 (1998), pp. 867–896.

R. Lentz and T. Tranaes, Job search and savings: Wealth effects and duration dependence. CAM Working Papers, Jan 2004.

H. Low, Self-insurance in a life-cycle model of labor supply and savings, Review of Economic Dynamics, 8 (2005), pp. 945–975.

A. Marcet, F. Obiols-Homs, and P. Weil, Incomplete markets, labor supply and capital accumulation, Journal of Monetary Economics, (Forthcoming).

E. R. McGrattan and R. Rogerson, Changes in hours worked since 1950, Federal Reserve Bank of Minneapolis Quarterly Review, (1998), pp. 2–19.

C. Meghir and L. Pistaferri, Income variance dynamics and heterogeneity, Econometrica, 72 (2004), pp. 1–32.

C. Phelan and R. M. Townsend, Computing multi-period, informationconstrained optima, Review of Economic Studies, 58 (1991), pp. 853–881.

J. Pijoan-Mas, Precautionary savings or working longuer hours, Review of Economic Dynamics, 9 (2006), pp. 326–352.

L. Pistaferri, Anticipated and unanticipated wage changes, wage risk, and intertemporal labor supply, Journal of Labor Economics, 21 (2003), pp. 729–728.

L. Pistaferri, H. Low, and C. Meghir, Wage risk and employment risk over the life-cycle. mimeo, 2004.

V. Sanchez-Marcos, O. Attanasio, and H. Low, Explaining changes in female labour supply in a life-cycle model. mimeo, 2004.

V. Sanchez-Marcos, O. Attanasio, and H. Low, , Female labor supply as insurance against idiosyncratic risk, Journal of the European Economic Association, 3 (2005), pp. 755–764.

G. Tauchen, Finite state markov chain approximations to univariate and vector autoregressions, Economic Letters, 20 (1986), pp. 177–181.

E. Trzcinski, Effects of uncertainty and risk on the allocation of time of married women, Journal of Family and Economic Issues, 17 (1996), pp. 327–350.