Spousal spillovers in the labor market: a structural assessment

Abstract

We explore the importance and nature of elderly couples’ labor market interlinkages, and how such linkages shape the response to welfare reforms. To this end, we build a life cycle model with dual-earner households, featuring heterogeneous age gaps, non-separable leisure preferences, and endogenous retirement. To inform key preference parameters, our calibration exploits quasi-experimental evidence of spousal retirement spillovers from a pension reform in Norway. We show that the experimental evidence is highly informative about the degree of non-separability of leisure and that a substantial level of complementarity is required to match the data. Using our calibrated model, we find that the commonly observed tendency of couples to retire together, despite considerable age-gap heterogeneity, can be entirely explained by leisure complementarities. Moreover, comparing to a model with leisure separability reveals that one-third of the long-run labor supply impact of the pension reform is attributed to complementarity. This illustrates the importance of accounting for interdependent decisions when evaluating policy reforms.