Worker Displacement and the Added Worker Effect

Abstract

This paper examines the effect of a husband's job loss on the labor supply of his wife, an effect known as the 'added worker' effect. Unlike past added worker effect studies which focus on the effect of the husband's current unemployment status, this paper analyzes the wife's labor supply response in the periods before and after her husband's job displacement in order to examine the short- and long-run adjustments to an earnings shock. Using the Panel Study of Income Dynamics, small pre-displacement effects are found along with larger and persistent post-displacement effects. The timing of the wives' responses differs by the type of displacement (plant closing vs. permanent layoff), possibly due to differences in the information wives acquire prior to the displacement. In addition, the response is found to increase with the magnitude of the husband's wage loss, to have changed over time (70's vs. 80's) and to vary by the husband's pre-displacement earnings. The long-run increases in the wife's labor supply account for over 25% of the husband's lost income.