Labour supply as a buffer: evidence from UK households

Abstract

This paper examines labour supply adjustment – both hours worked and
participation decisions. The analysis focuses on the response of each to
financial shocks, employing data from the British Household Panel
Survey. Results suggest that employees whose financial situation
deteriorates relative to what they expected, increase their labour
supply in response. That response is consistent with models of
self-insurance that incorporate labour supply flexibility. The shock
reflects several factors including financial wealth and a partner's
employment situation. The response is significantly larger for those who
change job, consistent with the importance of hours constraints within
jobs. The propensity to participate in the labour market also appears to
respond to the financial shock but that is somewhat less robust than
the hours response.