Household Search and the Aggregate Labor Market

Sharing risks is one of the essential economic roles of families. The importance of this role increases in the amount of uncertainty that households face in the labor market and in the degree of incompleteness of financial markets. We develop a theory of joint household search in frictional labor markets under incomplete financial markets. Households can insure themselves by savings and by timing their labor market participation. We show that this theory can match one aspect of the US data that conventional search models, which do not incorporate joint household search, cannot match. In the data, aggregate employment is pro-cyclical and unemployment counter-cyclical, but their sum, the labor force, is acyclical. In our model, and in the US data, when a family member loses his job in a recession, the other family member joins the labor force to provide insurance.