The rise of household insurance

Abstract

Since the 1980s, US households have been increasingly using joint labour supply as an insurance device against unemployment shocks. The added worker effect, measured as the increase in the flows into the labour force for individuals whose spouses have become unemployed, increased from roughly 8% to about 13%. To make sense of this pattern, we construct a Bewley-Aiyagari model with dual earner households and search frictions in the labour market. We subject the model to several well-known structural changes that have occurred in the US labour market since the 1980s: declining gender wage gaps, changes in labour market frictions and in attitudes towards female employment and finally higher wage inequality. We show that the first three structural changes resulted in a higher insurance value of added workers and made households focus more on this margin. In contrast, higher wage risk, associated with more uncertain outcomes following unemployment, has not contributed to the increase in the added worker effect that we document