Marriage Market and Labor Market Search with Endogenous Schooling Decisions

Labor market decisions are not taken in isolation when individuals are engaged in stable relationships. Our analysis is designed to determine the joint equilibrium distribution of schooling levels, labor market outcomes, and marriage market statuses. We assume individuals begin adult life by making a schooling decision. After schooling is completed, individuals enter the marriage market and the labor market. Each market is characterized by frictions and by match-specific shocks. Household interaction is assumed to be non-cooperative. Each spouse decides if accepting or rejecting a job offer and if keeping or quitting the current job. The spouse who is receiving the offer is the first-mover, while the other spouse acts as a follower. This timing solve the equilibrium multiplicity that may arise in the dual searchers setting we are analyzing. The model is estimated using the Method of Simulated Moments (MSM) using labor market information from the Current Population Survey (CPS) and marriage market information from the American Community Survey (ACS) under the assumption that a monthly CPS sample is a point sample from the steady state distribution. Using the estimates of the model, we perform several comparative statics exercises to determine the following. First, we separate the impact of the labor market from the impact of the marriage market in determining lifetime returns to schooling. Second, we explore the impact of eliminating gender differences in the wage offers distribution on marriage rates, assortative mating patterns, and schooling investments. Finally, we assess how important is the marital status in determining labor market outcomes. As a last contribution, we use the parameter estimates to perform a series of policy experiments comparing a labor income tax system based on individual taxation with a system based on joint taxation.