(Cont.) The government's capacity to insure workers is limited by the market wage setting, which gives workers a share in the employment surplus. When the government provides higher unemployment benefits, the bargained wages increase, and unemployment rises. These equilibrium responses have a negative effect on workers' welfare if workers' bargaining power is above a certain point, which is lower than the matching elasticity. As risk aversion increases, workers' share in the wage bargain is smaller, and thus the equilibrium effects are attenuated. The constrained optimal provision of unemployment benefits is a modification of the Hosios condition for efficient unemployment insurance and highlights the roles of bargaining and risk aversion. The optimal level of insurance increases with risk aversion, with the costs of creating a vacancy and with workers' higher bargaining power.

Abstract: My dissertation examines the relationship between the rise of female labor supply and the rise of the service economy and studies how labor market and unemployment policies affect family labor decisions. There are three essays in my dissertation. The first essay quantifies the Buera and Kaboski's (BK) service economy model and examines how the female labor supply is related to service growth. I discipline the model through calibration to assess how quantitatively plausible such an explanation is. By extending the BK model to a two-person household model, I incorporate a joint household decision on home and market production into the model, which provides a direct link between female labor supply and the growth of service economy. The calibrated analysis shows that both the BK model and the extended BK model are able to match nearly all of the growth in the service sector, and the channels emphasized in the BK model are quantitatively important. Using counterfactual experiments, I identify the rising efficient scale of service production and skill deepening of the labor force, particularly among the female population, as the most important channels of service growth. The second essay uses British Household Panel Survey data to examine how marital instability and partners' employment instability affect non-single mothers' employment responses to the 1999 in-work benefit reform in the United Kingdom. Previous studies have found small employment responses overall, but I find large responses among these subpopulations. My difference-in-difference analysis suggests that (1) there is about a 10 to 14 percentage point increase in the full-time employment of non-single mothers with unstable marriages relative to those with stable marriages as the result of the 1999 reform, and (2) there is about a 10 percentage point increase in the full-time employment of non-single mothers with unstably employed partners relative to those with stably employed partners. These results highlight the important interaction between household instability and the labor decisions of non-single mothers. The third essay examines how means-tested unemployment benefits affect couple's employment decisions. The literature has overly emphasized the negative work incentive of means-tested unemployment benefits, which does not provide full information for policy evaluation because the overall employment outcome matters more than the employment outcome of women with unemployed spouses. I show that means-tested unemployment benefits involve both negative and positive work incentives, the latter of which usually dominates to generate a higher employment rate, a greater proportion of dual-earner couples as well as a lower government expenditure on unemployment benefits.