In October 2015, the United Kingdom reported that its unemployment rate was actually lower than that of the United States, a situation that one Forbes reporter described as, “something I never expected to see.” While there are those who argue with these numbers and the statistical data is complicated, the announcement adds to Americans’ concerns about their financial futures.
Stanford University Professor Luigi Pistaferri addressed those issues by discussing how families cope with unemployment. “Family labor supply is not usually studied; in the past most of the research on unemployment has been about individuals. But we look at families and see how they make decisions as a unit,” Pistaferri explained.
Together with his co-authors Richard Blundell and and Itay Saporta-Eksten of the University of College London, Pistaferri developed a life-cycle model that incorporates household consumption and family labor supply decisions. They concluded that responses to unemployment vary depending on whether the situation is temporary or permanent and on who in the family unit has lost employment. They also found that consumption was smoothed in families even when hit with highly persistent economic shock such as long-term unemployment.
According to the authors, there are four primary ways that families continue to be able to purchase what they need when workers in a household are faced with unemployment:
1. self insurance, which includes both savings and access to credit;
2. the family labor supply, which includes what they refer to as the primary and secondary earner;
3. taxes and transfers, which include unemployment insurance; and
4. other support mechanisms such as assistance from grandparents or friends that vary too widely to be modeled.
The study used data from the Panel Study of Income Dynamics from the University of Michigan for the years 1999 to 2009. This includes comprehensive consumption measures of goods beyond food, including health services, utilities, and transportation. Entertainment, tobacco, and alcohol were not added to the panel until 2004, and thus were not used for this study.
To qualify to be included in the data, couples had to be married, the man had to be between the ages of 30 and 57, and he had to be employed for at least one hour of the year. The data assumes that the man is the primary earner and the woman is secondary.
The choice of data drew many comments from attendees, who questioned why this was the most interesting group to choose, why separated families were not used, and how to account for family arrangements where the woman works and the man stays home with the children. All of these were acknowledged as issues by Pistaferri (although he said they did not find that job loss led to separations) but he also explained that the PSID is the only large-scale panel study to include income, hours worked, and household assets. They chose the 30-to-57 age range because they wanted to study households that were already established and were in a maintenance phase. The data shows 80 percent of females working, and on average, they earn half of what the men make.
Pistaferri outlined a number of interesting findings. “Transitory shocks are completely smoothed by savings or borrowing,” Pistaferri said. When a wife loses her job temporarily, it has no effect on the husband’s leisure time, no wealth effect, and doesn’t change his labor supply.
On the other hand, if she permanently loses her job, that causes a wealth effect and the husband has to lower his leisure time and the cost of goods he purchases.
Unlike the husband, the wife’s labor is very sensitive and elastic, Pistaferri showed. When the husband temporarily loses employment, she is more likely to either join the labor force or increase her hours worked, and she is also likely to reduce spending.
However, if her time is reduced at work or she loses her job, and that changes the tax position of the family, she may not return to full-time work. This is not, he pointed out, a play for more leisure time as has been suggested by other economists, but a reluctance to work longer hours to earn the same money.
In the face of a permanent reduction in income, such as a job loss or a reduction in wages, spouses may in fact begin to work longer hours to compensate. These labor changes might also change the spending habits of the home. If both spouses are out of the home for 12-hour days, they are spending less on utilities and on food in the home.
Ideally, spouses would select jobs in different fields on opposite ends of the risk spectrum, so that if one loses a job the other would likely not. But Pistaferri explained that many couples work in similar if not the same fields, and are not able to do that.
But what smooths consumption changes as families age. In the earlier part of families’ lives, the response to income shocks is to work more. One or both spouses take second jobs or add more hours if that is an option. But with age, and hopefully greater creditworthiness, shocks are better borne by using savings and accessing the credit markets. “Of course, if you have lots of assets, that is the best way to smooth consumption,” Pistaferri added.