Macro Lunch - Edoardo Ciscato

May 23, 2017

12:45 - 2:00pm

Louvain-la-Neuve

D 350

Edoardo Ciscato

(Sciences Po)

will give a presentation on

Marriage, divorce and unemployment risk

Abstract :

The economic theory of the family suggests that divorce may occur following a negative shock on economic or non-pecuniary gains from marriage. A job loss, for instance, is likely to have important consequences on household stability. Unemployment shocks may partly destroy gains from marriage by reducing disposable income, public good expenditure and consumption complementarities. The household sees its Pareto frontier shrinking but is still able to react by switching to a different allocation, so that the spouse who experienced the labor market shock is partially insured. However, if the shock hits too hard, the other spouse might decide to walk away rather than insuring his/her partner. When divorce costs are low and agents know that they can remarry, the lack of commitment represents a limitation for the insurance mechanism implied by the marriage contract. Hence, understanding how families react to changes in unemployment risk along the business cycle is of primary importance for policymakers.

In this paper, I model the marriage market in a search and matching framework where agents experience stochastic changes in their employment status. Married couples face two layers of uncertainty: about the quality of their match and about the employment status of the spouses. When hit by a shock, a couple re-bargains over monetary transfers and the wife's labor supply so that both spouses' participation constraints are satisfied. If no such an allocation is available, the couple splits. Reservation values correspond to the lifetime utilities as singles, and are endogenously computed taking into account agents' remarriage prospects. Such a characterization is only possible by solving for the search equilibrium of the model.

The recent advances in the econometrics of search-and-matching models allow me to identify and estimate the underlying production function - source of the marriage patterns observed in the data - starting from data on marriage flows and employment. Preliminary findings obtained through counterfactual exercises suggest that, when the hazard of unemployment is low but expected unemployment spells long, labor market shocks are very disruptive.

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