Download PDF: Life Course Centre Working Paper: 2020-23
Fabio I. Martinenghi
Divorce takes a toll on psychophysical wellbeing and finances. Exit costs, the psychophysical and financial ‘costs’ of divorce, are well documented outcomes of marital separation. The Family Law Amendment Act, a policy introduced in Australia in 2008, changed the way non-marital separation is settled. This law defines cohabiting partnerships as de facto relationships and makes the termination of a de facto relationship financially equivalent to a divorce. This has led to higher financial exit costs in non-marital separations. I exploit the Family Law Amendment Act as a natural experiment to study the impact of these increased financial exit costs of separation on the stability of new and existing cohabitating couples. In particular, to measure the impact on new couples, I use the Household, Income and Labour Dynamics in Australia (HILDA) Survey and compare the duration of cohabitations started in the three years prior to the reform with those started in the three years after. Under the assumption that these two groups are very similar after taking into account generational differences, I am able to retrieve the causal effect of the reform on the stability of new partnerships.
I find that when terminating a cohabitation becomes as costly as getting divorced:
- New partnerships are more stable, with an increase in the stability of cohabitations that makes the (possible) following marital phase more stable too.
- Existing cohabitants affected by the reform in their third year are more likely to split.
- The probability of starting a cohabitation and the duration of premarital cohabitation do not change.
In particular, result 1 is consistent with the “cohabitation inertia” hypothesis. This hypothesis states that cohabitation makes one more likely to marry their partner compared to a scenario in which they were not cohabiting. Indeed, I provide evidence that policies improving the stability of cohabitation improve the stability of marriage too. This particularly is particularly relevant to countries such as Australia, where marriage is mostly preceded by a period of cohabitation.