Is there an added worker effect? - European labor supply during the crisis

This paper analyzes the responsiveness of an individual’s labor supply to the job loss of his or her partner – the so-called “added worker effect (AWE).” While the bulk of empirical studies have utilized discrete choice models to identify its existence, we provide a macroeconomic indicator of the AWE in order to assess its economic significance for the labor force participation rate (LFPR). Our empirical analysis focuses on Europe in the period from 2002 to 2012, revealing that the AWE is negatively related to the business cycle and was particularly pronounced during the global financial crisis. While the LFPR increased by roughly 1 percentage point in Europe from 2009 to 2012, half of the effect is attributable to added workers. As our indicator is based on a rich micro dataset (European Labor Force Survey) we are also able to consistently present individual country results for nearly all EU Member States. Our analysis shows high increases in added workers in euro area countries that were strongly affected by financial market stress and in EU countries that experienced the bursting of housing bubbles. By contrast, we do not find an AWE in most Central and Eastern European countries.