Skip to main content

Testing the Family Investment Hypothesis: Theory and Evidence

This paper presents new tests for the family investment hypothesis (FIH). In credit-constrained households some family members participate in the labor market to financially support their families. However, these family members would have not worked if their families were not credit-constrained. As a consequence the support provided by these family members will decrease as their families overcome credit-constraints. The support usually takes the form of working in dead-end jobs that do not necessarily require much skill.

We show that a simple two-period labor supply model produces testable implications on the occupational choices and work hours for married women. We analyze the occupation choices for married women using a first-order Markov switching model. Our findings, based on the matched March Current Population Survey for 1996-2002, are consistent with the FIH. We replicate the annual hours worked specifications used in previous papers and demonstrate that the conventional results get reversed when the sample is confined to low-skilled women.

This is joint work with Nalina Varanasi.