Labor Economics: Household Production, The Family, and the Life Cycle PDF

10/24/2024 A Labor Supply that Incorporates Household Production...

10/24/2024 A Labor Supply that Incorporates Household Production We built a model of labor supply on the simple assumption that people Labor Economics have but 2 ways to spend time: Working Leisure LABOR SUPPLY: HOUSEHOLD PRODUCTION, for pay THE FAMILY, AND THE LIFE CYCLE In reality, of course, the choices are more complex – and much of the time spent at home is in activities (cooking, cleaning, child care, etc.) that are closer to work than to leisure. INSTRUCTOR: Can we build a model of labor supply that takes MARIA CORAZON B. ALBAÑO account of these other uses of household time? To get a sense of how potential labor force participants actually allocate their time, lets break down activities into four categories (paid work, household work, leisure, personal care) for three household groupings based on the presence and ages of children. The Basic Model for an Individual: Similarities with the Labor-Leisure Model “Leisure time” >> “Household Production time” or “Household Time” ( Time spent in household production includes doing chores or relaxing at home, but it also includes time spent on chores or relaxation that take one out of the household such as shopping or going to a movie.) To illustrate the major SALLY effects including household activities other unmarried  Women with very young children spend more time in household work activities and less time than leisure into our model, mother of small performing paid (or “market”) work than women with older children. let us consider a  Women in all 3 categories of households spend more time in household work and less time in paid hypothetical household children work than men do – but these disparities in hours shrink as children grow older and leave home with a single decision-  Leisure time, which is now nearly equal for men and women, increases for both women and men as maker, Sally. children age.  Personal care time varies little across groupings. The Basic Model for an Individual: Similarities with the The Basic Model for an Individual: Similarities with the Labor-Leisure Model Labor-Leisure Model  Sally needs 8 hours a day for personal care, so she has 16 hours per day available for paid work, leisure, or household work.  We put Sally’s available time on the horizontal axis Sally’s choices how to use her  Household time – from left to right time are affected by her  Market Work (paid work) – from right to left  Preferences  We assume that Sally is trying to maximize her utility. She can acquire the commodities that  Income enhance her utility – a clean house, good meals, happy children, relaxation activities – either by spending household time to make these commodities herself or by earning  Wage rate income that allows her to buy goods or services from others Income SALLY The two axes reflect the 2  unmarried sources of inputs that  mother of can be used to produce small utility for Sally: children  Horizontal Axis: Household time 0 16 Household Time  Vertical Axis: Income 16 0 Time at Paid Work 1  10/24/2024 a. Preferences Nutritional Meal The Basic Model for an Individual: Similarities with the Grow her own food Labor-Leisure Model or Eating meals in a and fully prepare her restaurant meals at home Relaxation A day hiking in a local park or An evening at a nighclub (Involves time but not (More purchased much purchased goods) goods and less time) Because PURCHASED GOODS and TIME are substitutes for each other in producing commodities that generate utility, Sally’s SALLY indifference curves are downward–sloping. SALLY Our graphical representation of Sally’s preferences assumes that if her ability to command resources were to increase – so that she could move from indifference curve Y to indifference curve Z – her utility would increase. b. Budget Constraint c. Income and Substitution Effect  The wage rate (w) is $10 per hour per and that nonlabor income (V) is $20. What will happen if Sally’s W↑?  Sally’s budget line is given by line ABC. At segment AB: H=16 and M=0.  If W↑ and Sally increases his or her hours devoted to labor market work (M↑) and  If Sally works 16 hours with no leisure time, her decreases hours devoted to home production (H↓), then the substitution effect is labor income will be $160 while total income stronger than the income effect. will be $180 ($160+ $20). W↑ M↑ H↓ Substitution Effect The slope of the constraint reflects her  If W↑ and Sally reduces his or her hours of labor market work (M↓) and increases wage rate, which is also the opportunity hours devoted to home production (H↑), then the income effect is stronger than cost of household time (that is, if the the substitution effect wage she can earn is $10 per hour, an hour spent in doing household chores or in leisure requires her to forgo $10 of W↑ M↓ H↑ Income Effect potential earnings. c. Income and Substitution Effect c. Income and Substitution Effect Example What will happen if Sally’s W↑?  In Sally’s case, the difference between his/her income effect and substitution effect due to changes in W and V will depend on the shape (steepness or flatness) of Sally’s indifference curves – that is, preferences for M and H. 2  10/24/2024 c. Income and Substitution Effect Example Joint Labor Supply Decisions within the Household For those who live with partners, some kind of joint decision-making process must be used to allocate the time of each and to agree on who does what in the household. To model the different decision-making processes, here are the assumptions: 1. There is a single decision-maker to marriage partners, either by assuming they both have exactly the same preferences or by assuming that one makes all the decisions 2. Partners bargain with each other. This model suggests that partners with greater access to resources carry more influence in family decision- making. Whatever process partners use to decide on the allocation of their time, and it may be different in different households, there are certain issues that nearly all households must face. Specialization of Function Specialization of Function Partners often find it beneficial to specialize in some extent in the work that needs to be done, both in the market and in the household. If a given woman’s wage rate is lower than her husband’s and the woman is more productive in child-rearing, the family gives up less in market goods and gains more in child-rearing if the wife takes primary meal planning Consider a couple trying to decide which partner, if responsibility in this area. either, will take primary responsibility for child-rearing by staying at home. Because the person with What the theory of household production emphasizes is shopping primary child-care duties will probably end up that the distribution of household work may well change spending more hours in the household, the couple as wages, incomes, and home productivities change. needs to answer 2 questions. Implications for the Future: One study has found that when both home Who is relatively more  Wage rates for women typically have been below spouses work outside the home, the weekly hours that each spends in maintenance productive at home? those for men.  It is likely that because of household work are affected by their relative wage rates. socialization, wives have Who is relatively more been historically more If W↑Wives → H↑Husbands while H↓Wives productive than husbands in child-rearing productive in market work? child-rearing. If W↑Husbands → H↑Wives while H↓Husbands Do Both Partners Work for Pay? It is clearly not necessary, of course, that one partner specializes in household production by staying home full-time. If both partners are at a point like A, increasing time in paid work by decreasing time at home from H0 to H1 will add more in resources (BD) than is required to compensate for the lost home time (BC). Generally speaking, as long as an extra hour of market work by both partners creates the ability to buy more goods and services than are required to compensate for the lost hour of household time, both can enhance their resources if they work for pay that extra hour. 3  10/24/2024 Life Cycle Aspects of Labor Supply Because market productivity (wages) and household productivity vary over the life cycle, people vary the hours they supply to the labor market over their lives. When to Work over a Lifetime Just as joint decisions about market and household work involve comparing market and home productivities of the 2 partners, deciding when to work over the course of one’s life involves comparing market and home productivities over time. The basic idea here is that people will tend to perform the most market work when their earning capacity is high relative to home productivity. Conversely, they will engage in household production when their earning capacity is relatively low. Would it be rational for her to schedule her vacation Similar decisions can be made over longer periods of time, even one’s (a time-intensive activity) in November? entire life. The answer depends on her market productivity relative Empirical tests to her household productivity for the 2 months. of the life cycle model of labor Her market productivity (wage rate) is higher in July supply are than in November, which means that the opportunity costs of a vacation are greater in July. relatively recent; to date, If she has children who are free to vacation only in they suggest July, she may decide that her household that life-cycle productivity(in terms of utility) is so much greater than Sales Representative in July than in November that the benefits of considerations vacationing in July outweigh the costs. are of modest July’s income is twice Market productivity Workers will spend more time at paid importance in that of November If she does not have children, of school age, the (reflected in wage) starts work activities in their (relatively high- the labor supply utility generated by a November vacation may be low in the young adult wage) middle years. Similarly, life sufficiently close to that of a July vacation that the years, rises rapidly with age, cycle considerations suggest that the decisions of smaller opportunity costs make a November then levels off and even most workers. consumption of very time-intensive vacation preferable. falls in the later years. leisure activities will occur primarily in one’s early and late years. 4  10/24/2024 Child-Care Subsidies Policy Application Reducing the Fixed Costs of Care Such subsidies do not guarantee CASE#1: A mother who is not now working. If fixed that all those out of the labor force Child-Care Subsidies cost were reduced to zero by a child-care subsidy, would now join it, because some she would now find it beneficial to work. people will have such steep Just as joint decisions about market and household work involve comparing market and indifference curves that work will home productivities of the 2 partners, deciding when to work over the course of one’s life Thus, child-care subsidies that reduce or remove the still not be utility-maximizing. involves comparing market and home productivities over time. fixed cost of child care will encourage work among those previously out of the labor force. Note, however, that the mother Reducing the Fixed Costs of Care CASE#2: A mother who is already working when the depicted remains in the labor subsidy was adopted. force. Suppose for a moment that child-care costs are purely fixed, so that without For those already working, removing the fixed cost of a subsidy, working parents must pay a child care has an income effect that pushes them certain amount per day no matter toward fewer hours of work hour many hours their children are in care. Our analysis above suggests that child-care subsidies would have a theoretically ambiguous effect on the hours of work among those already in the labor force.  The effect on the labor force participation, however, is theoretically clear: child-care subsidies should increase the labor force participation rates among parents, especially mothers. 5