In the United States, about 35 – 40% of all marriages end with a divorce. Yet, average probabilistic expectations of divorce are considerably lower, which is consistent with evidence regarding overoptimism in the psychology literature. In this paper, we incorporate overoptimistic expectations about divorce into a household life-cycle model with an endogenous accumulation of human capital and assets. We account for ex-ante heterogeneity in both spouses’ wages. Couples jointly choose their market hours, home production hours, and joint savings. We quantify the model using data from the US and show that overoptimism about marital stability leads to (1) higher within-couple specialization and (2) lower savings because overoptimistic couples do not anticipate the insurance value of human capital and assets in case of divorce. The higher specialization of overoptimistic couples is driven by reduced market hours of the lower-wage spouse, which contributes to lower human capital accumulation, thereby exacerbating within-couple wage inequality. Overoptimism during marriage propagates beyond divorce through assets and human capital, which is particularly harmful to the less-insured, lower-wage spouse. The initially higher-wage spouse potentially benefits from over-optimism. In contrast, the lower-wage spouse loses outweighing the partner’s gains. If all couples acted under rational expectations, the aggregate levels of hours worked, human capital, and assets in the economy would increase substantially. Finally, a divorce fund that reallocates resources from married couples to divorcees leads to ex-ante welfare increases except for rational men.

We formalize and estimate the dynamic marginal efficiency cost of redistribution (MECR) in the spirit of Okun’s “leaky bucket”. We analyze the MECR of an income-contingent childcare subsidy program and the income tax within the German context, using a dynamic structural heterogeneous-household model of childcare demand and maternal labor supply. This allows us to compare which of these two policies is more efficient in achieving redistributive goals. Our analysis identifies two competing forces. (i) Labor supply responses increase the MECR of the childcare subsidy relative to the income tax. (ii) Child development effects decrease the MECR of the childcare subsidy relative to the income tax. For reasonably large Pareto weights on children, we find that (ii) dominates (i) and therefore the childcare subsidy is the more efficient redistribution tool.

Childcare policies improve the compatibility of family and career and therefore increase maternal life-cycle earnings and tax payments. How much should childcare be subsidized due to this dynamic fiscal externality? To provide quantitative answers, we estimate a dynamic discrete choice model of female labour supply and childcare decision on German panel data. We account for a large amount of heterogeneity: beyond heterogeneous preferences, education levels, wages, and availability of informal child care, we also account for heterogeneity in fertility such as timing of birth(s) and number of children. In addition, we incorporate regional differences in public childcare availability and subsidies. We then evaluate the universal childcare program in Germany through the lens of this model. We find that a recent major expansion of publicly provided childcare supply (almost) fully paid for itself through the dynamic effects on maternal tax payments. Increasing subsidies further from the current generous levels (approx. 80%), however, would only recover 6% of its costs because it would primarily benefit households that are infra-marginal in their childcare and labour supply decision. We further explore the fiscal resturns of increasing the number of daycare centers to reduce commuting distances for parents.

We investigate the role of targeted subsidies in France for regional labor market outcomes. In many developed economies, the structural decline of manufacturing sectors left formerly flourishing regions in distress. In contrast to previous work that has focused on the level of local subsidies, we are interested in how local subsidies are spent. Therefore, we study a policy that created regional variation in the freedom to allocate subsidies within a region while keeping the overall amount of subsidies constant for each region. When regional authorities have more discretion on how to spend their funds, would they finance projects that have either immediate employment benefits for the current population or a higher potential for future employment growth? We find that regional authorities shift allocations to sectors with stronger growth in value added. Furthermore, employment and hours of work increase persistently driven by low-skilled manufacturing labor. In contrast, low-skill services take a negative hit. Hence, granting regional authorities more freedom to choose how to subsidize firms with a given budget stems against the general trend of decreasing low-skilled manufacturing employment. But it also hinders a transition to services and mid-skill jobs.

Linking data from the National Longitudinal Survey of Youth 1979 (NLSY79) and the NLSY79 Children and Young Adults, we document a substantial positive correlation of employment status between mothers and their offspring in the United States. After controlling for ability, education, fertility and wealth, offspring of permanently employed mothers have an 11 percentage-point higher probability to be employed in each given year than those of never employed mothers. The intergenerational transmission of maternal employment is stronger to daughters but significant also to sons. Investigating potential mechanisms, we provide suggestive evidence for a role model channel, through which labor force participation may be transmitted. Offspring seem to emulate the example of their mother when they observe her working. By contrast, we are able to rule out several alternative candidate explanations such as network effects, occupation-specific human capital and local conditions of the labor market.

We examine the impact of the global recession triggered by the Covid-19 pandemic on women’s versus men’s employment. Whereas recent recessions in advanced economies had a disproportionate impact on men’s employment, giving rise to the moniker “mancessions,” we show that the pandemic recession of 2020 was a “shecession” with larger employment declines among women in most countries. We examine the causes behind this pattern using micro data from several national labor force surveys, and show that both the composition of women’s employment across industries and occupations as well as increased childcare needs during closures of schools and daycare centers made important contributions. Gender gaps in the employment impact of the pandemic arise almost entirely among workers who are unable to work from home. Among telecommuters a different kind of gender gap arises: women working from home during the pandemic spent more work time also doing childcare and experienced greater productivity reductions than men. We identify two key challenges for future research. First, why is the pandemic gender gap pervasive, i.e., why did women experience larger employment reductions than men even after accounting for industry/occupation and childcare effects? Second, how will the pandemic shape gender equality in a post-pandemic labor market that will likely continue to be characterized by pervasive telecommuting?