Betting the House: How Assets Influence Marriage Selection, Marriage Stability, and Child Investments with Corinne Low

How do we understand the marriage contract from an economic standpoint? Just as value is created, divided, and exchanged in the labor market, so it is on the marriage market. Last week’s WAPPP seminar featured Corinne Low, Assistant Professor of Business Economics and Public Policy at the Wharton School at the University of Pennsylvania, as she described the results of her study on marriage and homeownership as a lens into understanding what is valuable about the marriage contract, who reaps value from the marriage contract, and as policies change, how that value is changing over time.

While marriage was previously the universally adopted or aspired to family arrangement, this is no longer the case. There has been a recent increase in cohabitation and nonmarital fertility. However, this change does not necessarily mean that tastes or social values have changed; rather, Professor Low wonders, what in the marriage equation has changed to make people optimize their preferences differently? How has this changed been applied throughout society, where we see a tremendous amount of stratification in rates of marriage based on income, level of education, and race?

The key question in this line of inquiry is what made marriage valuable in the first place, and what made it retain value for some populations and lose value for others?

The marriage contract and nonmarital cohabitation have converged in recent years: the security of marriage has decreased with the advent of unilateral divorce, whereas nonmarital relationships have become more secure with the enforcement of paternity rights and responsibilities outside of marriage. However, there remains one key difference: only in marriage are assets divided up upon divorce. If one person in a cohabitating couple is making all of the mortgage payments, if that relationship breaks up, the other gets nothing. However, in a marriage contract that asset is divided or, very often, assigned to the mother (throughout the presentation, Professor Low referred to this effect in terms of husbands and wives; while this is not universally true, it is disproportionately the case and was used illustratively).

There is, therefore, an important distinction between income, which will be divided in both marital and nonmarital relationships in the form of child support, and asset-sharing, which is unique to the marriage contract.

Home-purchasing, according to Professor Low, may be an important way for husbands to commit to their wives. Because she will be guaranteed at least a share of that valuable asset if the relationship goes south, in her economic calculus it makes sense to invest in the human capital of the children, even if it reduces her own income. Similarly, because the house is at risk, it disincentivizes the husband from unilaterally seeking a divorce. “Betting the House” may be a way of securing the marriage contract.

Investing in children has a cost – if a parent spends time investing in children, they have less time to invest in their own human capital. Generally mothers are the ones making these large investments – women tend to experience a decline in wages after having children, and economically speaking it makes sense for the lower-income partner to invest in children. While marriage used to provide some security for these investments, the marriage contract got more precarious as divorce became easier and more common. However, high-asset individuals can still offer some of this insurance, because those assets will be divided and can provide security for child human capital investments. As such, marriage is really only useful for people who have assets: the decision has less to do with a desire to invest in child human capital than with an ability to secure that investment with assets that can back the marriage contract.

Now that paternity rights and responsibilities are enforced outside of marriage, nonmarital relationships are just as good as marital relationships for individuals without the assets to buy a house – only those with assets get the extra security for their marriage contract. As such, people without assets will flee from marriage, and those with assets will continue to get married. Professor Low and her colleagues set up a model in which nonmarital couples, upon splitting up, would either receive no asset transfer, 1/3 of what the asset transfer in a marital relationship would be, or 2/3 of the marital relationship asset transfer. Under each of these conditions, how do individuals’ preferences change with respect to marital and nonmarital relationships? With no nonmarital transfer, people without assets are divided between marital and nonmarital relationships. At the 1/3 transfer level, people without assets significantly increase their nonmarital fertility. At the 2/3 level, still less than what a spouse would get if a marriage split up, people without assets entirely abandon marriage. At each stage, people with assets choose marriage.

This hypothetical bears out in the data: looking at a longitudinal data set of marriages and average home prices in the year of marriage, those who got married in an era of high housing prices were less able to purchase a home when they got married, and therefore they were less able to secure their child human capital investment. While there are certainly other explanations available, couples facing high housing prices at the time of their marriage tend to have fewer children, and their children are more likely to be held back in school. Assets provide commitment value that allows for greater specialization in the home and more optimal investments in children, which makes the marriage contract more valuable.

This data demonstrates that legal changes (unilateral divorce and paternity acknowledgement) and concordant economic change can be responsible for stratification in marital decisions, rather than “tastes” or preferences. This finding has significant implications for policymakers, as the racial gap in assets and homeownership is much larger than the racial gap in income, in part because of redlining and mortgage discrimination practices. The gap in marriage among racial groups that has been attributed to tastes or values can actually be attributed to homeownership or the ability to get a mortgage.  If we take marriage seriously as an economic contract, it is evident that policies that change the contracting environment have deep implications. This model provides a contracting explanation for why marriage might lead to greater child investment, without relying on arguments about preferences.

New Evidence Against a Causal Marriage Wage Premium

“It is a truth universally acknowledged, that a single man in possession of a good fortune must be in want of a wife.” Or is a man with a wife more likely to earn a good fortune? Many social scientists have observed a “marriage premium” for men, where their wages increase with marriage. Some policymakers have tried to encourage marriage in order to increase social welfare. But is the relationship between marriage and higher pay causal? In this week’s WAPPP seminar, Professor Alexandra Killewald, John L. Loeb Associate Professor of the Social Sciences at Harvard University, discussed her work casting doubt on the causal marriage wage premium.

The most common explanation for the marriage premium is specialization. Once married, the theory goes, couples are able to divide up the work that they previously had to do alone. If one partner is particularly good at laundry but terrible at doing the dishes, they can do laundry while their partner does the dishes. This division of labor is an efficient use of each partner’s talents and cuts down on the overall time spent doing housework. In Gary Becker’s original theory, men were thought to have a comparative advantage for work outside the home, while women specialized in domestic work. Adjusting for these specializations meant that married men would spend more time on paid labor, which would increase their wages.

However, there are many other possible explanations for the marriage premium. Professor Killewald focused on two: the reverse causation explanation and the transition to adulthood explanation. It could be that causation between marriage and higher wages actually works in reverse. Men anticipating marriage may seek out better-paying jobs to enhance their financial stability before they get married. Alternatively, it could be that most adults get married in a period of great personal growth in many areas, including work. Wage increases and marriage may be two entirely separate phenomena that tend to happen around the same time, which leads us to infer causation.

Using data from the NLSY79, a representative sample of individuals who have been surveyed from 1979 through the present day, Professor Killewald set out to empirically adjudicate between these competing explanations. She presented four tests for our three proposed explanations. However, she noted, it was unlikely that we would discover one perfect alternative explanation for the observed marriage premium. Instead, this work is meant to question the presumed causal relationship that marriage leads to higher wages.  

Test 1: How far in advance of marriage do wages increase?

If the causal marriage wage premium existed, we would expect a sharp spike in wages immediately after marriage. On average, men’s wages increased starting five years before marriage, continued to increase for three years after marriage, and then flattened out. This pattern seems to rule out specialization, as we don’t see a shift in wages at the point of marriage. (Similarly, the timeline for increasing wages doesn’t fit with discrimination: if employers were inclined to pay married men more than unmarried men, it is unlikely that we’d see that effect beginning five years before marriage!) Instead, this pattern fits much better with a reverse causation argument—that men seek out high-paying jobs in anticipation of marriage—or a transition to adulthood explanation, as a young man’s wages increase from the early stages of his career, around the same time he chooses to marry.

Test 2: What happens around divorce?

If marriage causally affected wages, we would expect to see a decline in wages immediately after divorce. Instead, wages begin to decrease about 1-2 years prior to divorce and continue to decrease thereafter. This evidence is most consistent with a reverse causation argument: anticipating divorce may mean that financial stability isn’t as important, so men are more willing to take on riskier jobs with lower pay. Alternatively, a decrease in financial stability may be a key factor leading to divorce.

Test 3: Does age of marriage matter?

Based on a causal argument, we would expect wages to increase with marriage regardless of timing. By contrast, a reverse causal or transition to adulthood explanation would predict that wages increase the most for those who get married young. Splitting the data into three groups, we find large wage increases for men who get married at 22 or under and from 23-26. However, men who marry at age 27+ show very little change in wages. At minimum, this suggests that anticipation of marriage doesn’t help men who get married late, and lends some support to the transition to adulthood hypothesis.

Test 4: What about shotgun weddings?

The reverse causal explanation rests on men anticipating marriage and seeking out higher-paying jobs ahead of time. But what about marriages that are less likely to be anticipated? Professor Killewald examines marriages in the dataset where the couple’s first child was born within seven months of the wedding. In this data, we still see a wage increase in the years leading up to marriage even when the marriage was not anticipated. This is consistent with the transition to adulthood hypothesis rather than either of the causal theories.

Based on these four tests, the evidence provides support for the reverse causal explanation and particularly for the transition to adulthood hypothesis. None of these tests validated the causal specialization explanation: being and staying married is not directly related to higher wages for men. This study should make us cautious about using marriage as a policy lever.

Marriage Market: Love and Financial Planning

“I take thee as my lawfully wedded husband and my social insurance for old age” makes for an awkward wedding vow, but a plausible one. Petra Persson, Ph.D. Candidate at Columbia University and a WAPPP fellow, examined the effects of social insurance policies on the marriage market. Through econometric modeling, she demonstrated the effect of a specific policy change in Sweden in 1989 on the decision of couples to marry.

The idea is that when Sweden changed its survivor benefits policy in 1989, there was an announcement that unmarried couples who had a child could get married by the end of the year and still qualify for the “old” benefits. The new benefits were significantly lower – a one-time payment to the surviving spouse, versus an annuity to the surviving wife under the old system. Lo and behold, a record number of couples got married in the last quarter of 1989. There were also differences in divorce rates and other indications that the marriage market responded to the change in social insurance policy.

In the case of Sweden, the reform was not intended to incentivize marriage, but the fact that there was a marriage market response has implications for when it’s optimal to separate social insurance from marriage. Ms. Persson argues, convincingly and quantitatively, that the society’s gender wage gap is the key determinant of whether it’s optimal to separate social insurance from marriage.

In a hypothetical country with large gender gaps and a traditional structure where everyone marries for life and husbands are the breadwinners, there are economic gains from tying benefits to marriage. The social insurance helps the surviving woman who cannot provide for herself. In the opposite hypothetical scenario, where not everyone marries but everyone works, there are no gains from tying benefits to marriage. In fact there are losses when money is transferred to a survivor who is self-sufficient without it. In a realistic society where there is an intermediate gender wage gap, a social planner faces the trade-off between protecting the elderly women from poverty and distorting the marriage market.

To illustrate the trade-off, consider that the reforms in Sweden took place for budgetary reasons, but were couched in gender equality rhetoric – under the new system, it didn't matter whether a man or woman was the survivor, he or she would get the same one-time benefit. Sweden in the 1980’s, of course, still had its share of traditional marriages and women who did not work. Since women typically live longer, the removal of the widow annuity resulted in an increase in number of destitute old women. The government then had to step in again and provide welfare payments to these women – essentially creating a safety net program where the social insurance proved insufficient.

On the one hand, providing a safety net for the elderly is more equitable – a social safety net does not distinguish whether the man or woman was ever married. Why should we reward marriage, distorting the marriage market? On the other hand, social insurance is something every working individual pays into to tap in old age; so if this person dies before claiming the benefit, it is plausible that his or her family deserves some share of that money. 

These are the fundamental questions of social policy design. As evidenced by the Swedish example, the policies that flow from these questions have practical financial planning implications for couples contemplating taking the plunge…because nothing says “I love you,” like a conversation about social insurance.

Anya Malkov is an MPP candidate at the Harvard Kennedy School, a WAPPP Cultural Bridge Fellow, and an alumna of From Harvard Square to the Oval Office.