Labor Economics: Supply and Household Production

Labor Economics: Labor Supply and Household Production

• Labor supply models often assume individuals only have two choices: work or leisure. However, household activities (like childcare, cooking, cleaning) are more akin to work than leisure.
• A more complex model considers household work, paid work, leisure, and personal care time.
• Research shows women, regardless of children's presence, spend more time in household work than men, with disparity reducing as children age. Leisure time increases as children grow older for both men and women.
• Personal care time, however, varies less across household groups.
• The basic model for an individual (like Sally, a single mother) resembles the labor-leisure model, including budget constraints, preferences, and wage rates.
• Household time and income are substitutes. Sally can produce utility through household time or earned income, both of which contribute to her overall satisfaction.
• A wage increase affects labor supply through income and substitution effects:
• Substitution Effect: Higher wages make household time more costly, leading to reduced household time and increased market work (paid work).
• Income Effect: Higher wages increase purchasing power, potentially leading to reduced market work and increased household time. The outcome depends on the relative steepness of indifference curves.

Joint Labor Supply Decisions in Households

• Joint decision-making is crucial for married couples to allocate time and responsibilities within the household.
• Assumptions often include a single decision-maker or bargaining between partners, with resources affecting decision-making power.
• Specialization of function can be beneficial. Partners may specialize in market or household work based on productivity in each area (e.g., one partner being more adept at childcare than the other).

Specialization Decisions

• Wage differences, historical socialization, and productivity in different areas (like childcare) influence the distribution of household work within couples.
• If a woman's wage is lower than her husband's and she's more productive in child-rearing, the family may benefit from her taking primary responsibility for childcare

Implications for the Future

• The distribution of household work can change based on wages, income, and home productivity.
• Studies show changes in the weekly hours each partner spends on household work if both spouses work outside the home, affected most by relative wage rates.

Life Cycle Aspects of Labor Supply

• Market and home productivity fluctuate over a lifetime, influencing work hours.
• Individuals tend to work more when their earning capacity is high compared to household productivity.
• Conversely, they engage more in household production during lower-earning times of life.

Child Labor in Poor Countries

• The ILO estimates the number of children in hazardous work, suggesting a potential increase due to low-wage labor being used in manufacturing products.
• Two conflicting forces are at play:
• Increased earnings opportunities in manufacturing can draw children into the workforce.
• Increased income opportunities may lead parents to withdraw their children from work (income effect).
• Data suggests that the income effect might be stronger than the substitution effect in promoting reduced child labor.
• Economic theory predicts that child labor might decrease with higher parental income.

How Wage Increases Affect Labor Supply

• A temporary wage increase, without a corresponding increase in yearly income, significantly affects labor supply through the substitution, but not income effect.
• Workers respond by increasing hours of work during the wage increase period.

Policy Applications: Child Care Subsidies

• Reducing or removing fixed child care costs can encourage labor force participation, particularly among mothers.
• The effect of subsidies on the working hours of parents who already work is unclear. Some people may reduce hours to have more time in their households due to the income effect of higher income.