Displacement and household adaptation: insured by the spouse or the state?

We investigate the added worker effect in a setting where female labour supply is high and the welfare state is generous. We trace couples' labour supply and income development following the husband's job displacement. We find no support for the added worker effect for the full sample of households. However, the added worker effect seems to be at work for subsamples characterised by households where the spouses are not working in the same industry and where the wife did not work full time pre-displacement. When using a measure of total household income, which includes public transfers, we find that the negative income impact of displacement is reduced by approximately 60 to 70 % when we also adjust for lower tax payments. Results suggest that income loss due to displacement is mitigated more by social welfare payments than by labour supply responses of the spouse.