Moving Back Home: Insurance Against Labor Market Risk1

This paper uses an estimated structural model to argue that the option to move in and out of the parental home is an important insurance channel against labor market risk for lowskilled youths. Using data from the NLSY97, I construct a new monthly panel of parent-youth coresidence outcomes and use it to document an empirical relationship between these movements and individual labor market events. The data is then used to estimate the parameters of a dynamic game between youths and their altruistic parents, featuring coresidence, labor supply and savings decisions. Parents can provide both monetary support through explicit …nancial transfers, and non-monetary support in the form of shared residence. To account for the data, two types of exogenous shocks are needed. Preference shocks are found to explain most of the cross-section of living arrangements, while labor market shocks account for individual movements in and out of the parental home. I use the model to show that coresidence is an important form of insurance, particularly for youths from poorer families. The option to live at home also helps to explain features of aggregate data for low-skilled young workers: their high elasticity of labor supply and their relatively small consumption responses to labor market shocks. An important implication is that movements in and out of home can reduce the consumption smoothing bene…ts of social insurance programs. 1 I would like to thank Gianluca Violante, Thomas Sargent and Chris Flinn for the valuable advice they have provided at each stage of this project. I have bene…ted from participants at seminars and from discussions with people at various institutions that are too numerous to mention. Of course, all errors are my own.