Workers facing idiosyncratic income risk and credit market frictions gain from mutual insurance. In the context of families, this sharing of risks can lead to an «added worker effect»: a positive reaction of a worker’s labor supply with respect to the spouse’s loss of employment. Using unique panel data from Switzerland covering employment and tax records we study family responses to income shocks caused by plant closures. Using measures of household net worth and readily available assets, we identify credit constrained families, which according to theory should react most strongly to income shocks. We present evidence on heterogeneous responses in labor supply, household assets, and the stability of marriage. |
