Spousal Labor Supply, Caregiving, and the Value of Disability Insurance

Abstract

For married couples, spousal labor supply can act as a household insurance mechanism against one spouse’s earnings shock. This paper evaluates the insurance value of the Social Security Disability Insurance (SSDI) program among married households when wives face a time allocation problem between market hours and spousal care following their husbands’ disability. Using an event study approach, I find that while there is a sizable increase in wives’ working hours after their husbands’ job displacement, wives’ labor supply responses to their husbands’ disability are small, and instead, a considerable amount of time is spent in spousal care. I develop and estimate a dynamic structural model of married households and find that incorporating time loss due to spousal care increases the insurance value of SSDI relative to its costs. Furthermore, policy reforms such as supplementary caregiving benefits can improve social welfare.