Assortative Matching on Income Potentials, Intra-Household Specialization and Human Capital Formation

Abstract

This paper develops a novel model of marital sorting on income potentials: In the marriage market, people are matching on potential wage growth rates which differ across individuals. Gains from marriage arise from intra-household specialization as couples make joint decisions on how much time to spend on home production and how much time on labour market work. Couples' specialization decisions hence affect their human capital accumulation in the labour market and the realization of their potential income. The model is estimated by simulated minimum distance techniques with PSID data from 1968 to 2011. I find there is strong positive assortative matching on wage growth rates, which helps explain the correlated wage residuals for married couples. Households' market intensity and specialization arrangements are not affected when matching is switched to random, but the observed average wage growth rates would be higher. The estimated elasticity of substitution between market goods and home production is approximately 0.37. Husband's time and wife's time turn out to be complements in the home production function.