Abstract:
My paper explores how the presence of pre-committed consumption, such as mortgage payments and car loans, influences spousal labor supply, in response to unanticipated shocks to the primary earner's income in the family. It utilizes a stylized model to demonstrate how the costly adjustment of committed consumption affects household's behaviors, particularly the added worker effect. Then it proposes several important hypotheses regarding the implications of consumption commitments. The PSID data are used to estimate and test these hypotheses. Estimation results confirm that inflexible consumption indeed influences spousal labor responses during economic hardships. When husbands experience a negative income shock, wives from families with more resources allocated to infrequently adjusted goods are more likely to enter the labor market, if they were out of labor force prior to the shock. Moreover, they provide more hours regardless of previous employment status. The overall response from spouses used to be out of labor market is more significant than that from spouses already employed before the head's income cuts. The paper also examines the implication of higher commitments on other household decisions, such as savings and discretionary consumption.