Changes in Relative Wages and Family Labor Supply
Paul J. Devereux
A B S T R A C T
The large changes in relative wages that occurred during the 1980s provide fertile ground for studying the behavioral responses of married couples to
the wage changes of husbands and wives. I find estimates of own-wage and cross-wage elasticities for men that are very small. The own-wage elasticity
for women is positive and the cross-wage elasticity for women suggests a strong negative response of female labor supply to changes in their hus-
band’s wages. Family labor supply behavior determines how changes in individual wage rates translate into family earnings changes. The responses
of women to changes in their husband’s wages attenuated somewhat the increases in individual wage inequality at the family level: The results sug-
gest that the earnings of the wives of low-income men would actually have fallen over the decade if women’s labor supply did not respond to changes
in their husbands’ wages. However, assortative mating implies that wage changes of husbands and wives are correlated and so family earnings
inequality still grew during the decade of the 1980s.
I. Introduction
In the absence of behavioral responses, changes in individual wages will mechanically result in changes in family earnings inequality. However, both hus-
bands and wives can adjust their labor supply in response to changes in their own wage and in their spouse’s wage. The size and direction of these responses determine
the actual impact of changing individual level wage inequality to the family. Ultimately, understanding what happens at the family level is important since so much
of social policy is aimed at this level. The 1980s were a decade of enormous change
Paul J. Devereux is a professor of economics at the University of California, Los Angeles. He thanks Dan Ackerberg, Janet Currie, Eric French, Phillip Leslie, Kanika Kapur, and participants at the Summer
Meetings of the Econometric Society and the Rand UCLA Labor and Population Seminar for helpful comments. The data used in this article can be obtained beginning January 2005 through December 2008
from Paul Devereux, UCLA, email: devereuxecon.ucla.edu. [Submitted November 2001; accepted May 2003]
ISSN 022-166X © 2004 by the Board of Regents of the University of Wisconsin System
T H E J O U R NA L O F H U M A N R E S O U R C E S • X X X I X • 3
in relative wages affecting both men and women. During this period, the college wage premium increased dramatically and real wages of less-educated men fell. In this
paper, I study the behavioral responses of married couples to relative wage changes since 1979 and evaluate the role of these behavioral responses in mediating the result-
ant changes in family earnings inequality.
Because female labor supply is more responsive than male labor supply, compen- satory labor supply behavior may be particularly important for wives responding to
wage changes of their husbands. However, evidence from recent decades has cast some doubt on the importance of this response. Taking a synthetic cohort approach
using United Kingdom data, Blundell, Duncan, and Meghir 1998 find small and sta- tistically insignificant income effects. They identify labor supply elasticities using
changes in relative wages and income across groups of women defined by education and birth cohort. Thus, their finding implies that women whose husband’s income has
fallen have not responded by increasing hours of work.
Juhn and Murphy 1997, among others, have shown that labor supply in the United States during the 1980s increased more for the wives of high-wage men than for the
wives of low-wage men. Since the wages of low-wage men have fallen relative to the wages of high-wage men, this suggests that there is no strong relationship between
changes in male wages and female participation. However, this conclusion ignores assortative mating—high-wage men are more likely to be married to high-wage
women and so wives of men who experience positive shocks to their wages and labor supply are likely to experience the same positive shocks. Such assortative mating
makes it difficult to test whether women have adjusted their labor supply in reaction to changes in husband’s wages. To examine labor supply behavior in the context of
sizeable changes in relative wages of both men and women, it is necessary to estimate family labor supply functions that allow for changes in the relative wages of both men
and women.
In this paper, I use repeated cross-sections from the 1980 and 1990 census to esti- mate models of family labor supply. I exploit the major changes in relative wages of
both husbands and wives during this time period to identify the labor supply parame- ters of interest. In the estimation, I treat national and regional changes in relative
wages as exogenous variation that can be used to identify labor supply responses. If labor is partially immobile across regions, relative wage changes will differ by region.
It is well known that there are substantial differences across Census regions in the level and trend of measures of wage inequality see, for example, Karoly and Klerman
1994 and across metropolitan areas Borjas and Ramey 1995; Montgomery 1992. The approach I take is to use a grouping estimator to see how this cross-region varia-
tion in relative wage changes across husbands and wives with different characteristics corresponds to the cross-region variation in relative labor supply changes.
I show that despite the fact that labor supply has increased more for the wives of high-wage men, there is evidence for a negative and economically significant labor
supply response of women to changes in their husband’s wages. I use the model esti- mates to assess the role played by behavioral responses in transforming changes in
relative wages into changes in family earnings inequality. I find that female labor sup- ply responses to falling male wages are not sufficient to prevent falls in family income
for the families with least education. However, while compensatory labor supply behavior of wives was insufficient to maintain the family labor earnings of low-wage
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men, in the absence of such behavior, the earnings of wives of low-wage men would not have increased at all.
II. Literature Review
