continuous support and guidance. We also benefited a lot from the comments of Arpad Abraham,

Abstract

Sharing risks is one of the essential economic roles of families. The importance of this role increases in the amount of uncertainty that agents face and the degree of financial market incompleteness. We develop a theory of joint household search in frictional labor markets under incomplete financial markets. Couples households can insure themselves by savings and by timing their labor market participation. We show that this theory can match one aspect of the US data that conventional search models cannot match; that whilst aggregate employment is pro-cyclical and unemployment counter-cyclical their sum, the labor force is acyclical. In our model, and in the US data, when a family member loses her job in a recession the other family member joins the labor force to provide insurance. We also explore other important implications of our theory for the aggregate labor market. Our analysis offers new insights for the cyclical behavior of the labor wedge in models of heterogeneous agents and wealth accumulation