Tax-and-transfer systems differ in whether the individual or the household is the unit of taxation and benefit eligibility, with potentially large consequences for couples. We develop an equilibrium random search model of two-person households in which workers choose search effort, job acceptance, and quits, households save in a risk-free asset, and firms create jobs. Couples therefore insure against job-loss risk through three private channels — within-household risk sharing, precautionary savings, and precautionary job search — that interact in general equilibrium. We calibrate the model to U.S. data on job-finding, mobility, and separation rates and couples’ wage and wealth distributions. A balanced-budget reform replacing joint with separate progressive taxation raises employment by about 1.6 percentage points, as secondary earners face lower marginal tax rates. In contrast, a broad suite of unemployment insurance reforms — varying benefit generosity, duration, and spousal eligibility — produces smaller effects on employment and welfare, because couples’ private insurance channels crowd out public insurance. The unit of taxation, rather than the generosity of unemployment insurance, is thus the margin with first-order consequences for couples’ employment and welfare.
Co-authors: Leo Kaas (EUI), Nawid Siassi (TU Wien), Bastian Schulz (Aarhus)
