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Parents with an Unemployed Adult Child: Labor Supply, Consumption, and Savings Effects

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Abstract

The risk of labor market, health, and asset-value shocks comprise profound retirement savings challenges for older workers. Parents, however, may experience added risk if their children experience adverse labor market shocks. Prior research has shown that parents support their children financially through an unemployment spell. In this paper, we also provide evidence of financial support from parents and investigate if this financial support is accompanied by adjustments to parental labor supply, program participation, consumption, or savings behavior. With longitudinal data on parents and children from the Panel Study of Income Dynamics, we use within-parent variation in behavior to identify the effect of a child’s labor market shock on parental outcomes. We find results vary by the parent’s age: Parents younger than 62 years old increase labor supply and decrease savings rates, all parents reduce assets and usual food consumption.

Key Findings

  • With longitudinal data on parents and children from the Panel Study of Income Dynamics, this study uses within-parent variation in behavior to identify the effect of a child’s labor market shock on parental outcomes.
  • The youngest mothers (younger than 62) who have the most margin to adjust their behavior change on nearly every dimension: They reduce their food consumption, increase their labor supply, and reduce their pension saving.
  • The behavioral changes are larger than the monetary value of transfers — implying that either a) there are other mechanisms for transferring income to unemployed children that are not captured by cash transfers, or b) the behavioral response is in anticipation of changes in expectation about their child’s career prospects or changes in the probability of future employment disruptions.
  • The effect of child unemployment on mothers’ labor market, consumption, and savings behavior is large and is likely larger than we describe since we exclude adult children cohabiting with parents.
  • Younger mothers transfer money to their children when the child is unemployed, and older mothers transfer assets.

Citation

Edwards, Kathryn Anne, and Jeffrey B. Wenger. 2017. “Parents with an Unemployed Adult Child: Labor Supply, Consumption, and Savings Effects.” Ann Arbor MI: University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2017-368. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp368.pdf

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Project

Paper ID

WP 2017-368

Publication Type

Working Paper

Publication Year

2017