Testing the Family Investment Hypothesis: Theory and Evidence

Seik Kim, University of Washington
Nalina Varanasi, University of Washington

This paper presents a new test for the family investment hypothesis (FIH). We show that a simple two-period labor supply model produces testable implications on the work hours and occupational choices for married women. In credit-constrained households, to support the family, married women work in dead-end jobs that do not necessarily require much skill. The support decreases as they overcome credit-constraints. We analyze the occupation choices for married women using a first-order Markov switching model. Our findings, based on the matched March CPS 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 women who work in dead-end jobs.