Family2 Mar


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Family2 Mar

  1. 1. Economics of Family, Marriage and Divorce
  2. 2. Gains from Marriage or Cohabitation <ul><li>1. Specialization </li></ul><ul><li>2. Economies of scale </li></ul><ul><li>3. High quality housework at lower transactions costs </li></ul><ul><li>4. Risk sharing </li></ul><ul><li>5. Tax subsidies or penalties </li></ul><ul><li>6. Consumption complementarities </li></ul><ul><li>7. Higher wages for men </li></ul><ul><li>8. Lower risk of poverty </li></ul><ul><li>9. Better health </li></ul><ul><li>10. Other? </li></ul>
  3. 3. 1. Specialization <ul><li>Assume men and women have very different skills </li></ul><ul><li>One is more productive at home, the other in paid work </li></ul><ul><li>Productivity = output per hour </li></ul><ul><li>Model of specialization </li></ul><ul><ul><li>If She spends an hour in paid work, she can earn $10 </li></ul></ul><ul><ul><li>If She spends an hour in household work, she creates $20 value </li></ul></ul><ul><ul><li>If He spends an hour in paid work, he can earn $20 </li></ul></ul><ul><ul><li>If He spends an hour in household work, he creates $10 value </li></ul></ul><ul><li>The model will show: Both individuals can gain from being able to specialize in one of the two activities then “trading” with one another </li></ul>Production Possibilities She He Market $10 $20 H Prod $20 $10
  4. 4. Model of Specialization Draw Production Possibilities She He Market $10 $20 H Prod $20 $10 Household production Market 20 10 10 20
  5. 5. Model of Specialization Suppose She and He are single and each spends half of the time in market work and in housework. Value created: $15 each She He Market $5 $10 H Prod $10 $5 She alone He alone Household production Market 20 10 10 20
  6. 6. Model of Specialization Suppose She and He are married. She spends full time in housework. He spends full time in market work. Value created: $20 each She He Market $0 $20 H Prod $20 $0 She specializes full time He specializes full time Household production Market 20 10 10 20
  7. 7. Model of Specialization She specializes full time He specializes full time Comparative Advantage : ability to produce relatively cheaper than your trading partner He has CA in Market work, She in HProd For each $1 of Market earnings She sacrifices 20/10 = $2 of HProd He sacrifices 10/20 = $0.5 of HProd He has lower opportunity cost of Market work She has higher opportunity cost of Market work <ul><li>Specialization does NOT have to be complete for there to be gains </li></ul><ul><li>Larger gains to specialization if men and women have very different skills </li></ul><ul><li>Smaller gains to specialization if men and women are more alike </li></ul>Household production Market 20 10 10 20
  8. 8. Specialization <ul><li>Specialization model implies </li></ul><ul><ul><li>Household members should allocate their time in which they have a comparative advantage </li></ul></ul><ul><ul><li>Specialization is efficient and is a good thing </li></ul></ul><ul><li>Downsides of specialization : </li></ul><ul><li>Life-cycle changes : comparative advantage changes as individuals age (kids grow up) </li></ul><ul><li>Less likely to divorce even under extreme circumstances (e.g. domestic violence). </li></ul><ul><li>Loss of market productivity for housewives </li></ul><ul><li>I.e., if I stay home with the kids for 10 years, when I re-enter the paid workforce, my earnings potential will have fallen. </li></ul><ul><ul><li>This is risky given high probability of divorce . </li></ul></ul><ul><ul><li>Reduces incentives to specialize. </li></ul></ul><ul><ul><li>Both occur simultaneously: </li></ul></ul><ul><ul><ul><li> divorce   specialization </li></ul></ul></ul><ul><ul><ul><li> specialization   divorce </li></ul></ul></ul>
  9. 9. Gains from marriage: 2. Economies of Scale <ul><li>Costs less per person if two people live together </li></ul><ul><li>Time: </li></ul><ul><ul><li>Cooking for 1 vs. 2 </li></ul></ul><ul><ul><li>Cleaning, shopping, laundry, childcare, repairs </li></ul></ul><ul><li>Money: </li></ul><ul><ul><li>Buying in bulk </li></ul></ul><ul><ul><li>Less waste </li></ul></ul><ul><ul><li>Share fixed costs of HH public goods - goods that can be consumed by  1 person </li></ul></ul><ul><ul><ul><li>need one fridge if one person or 5 people </li></ul></ul></ul><ul><ul><ul><li>Furniture </li></ul></ul></ul><ul><ul><ul><li>Appliances </li></ul></ul></ul><ul><ul><ul><li>Utilities </li></ul></ul></ul>
  10. 10. 2008 Poverty Guidelines <ul><li>Economies of scale  </li></ul><ul><ul><li>Threshold for 2 people is NOT twice the threshold for one person </li></ul></ul>Persons in Household 48 States and D.C. Alaska Hawaii 1 $10,400 $13,000 $11,960 2 14,000 17,500 16,100 3 17,600 22,000 20,240 4 21,200 26,500 24,380 5 24,800 31,000 28,520 6 28,400 35,500 32,660 7 32,000 40,000 36,800 8 35,600 44,500 40,940 For each extra person, add 3,600 4,500 4,140
  11. 11. Gains from marriage: 3. High quality housework, low transaction cost <ul><li>2 ways to get HH produced goods : </li></ul><ul><li>1)  hire out, buy services </li></ul><ul><ul><ul><li>High transaction costs for small tasks </li></ul></ul></ul><ul><ul><ul><li>Employee might not do good job, hard to monitor </li></ul></ul></ul><ul><ul><ul><li>Principal-agent problem </li></ul></ul></ul><ul><ul><ul><ul><li>Different incentives for those who hire and who are hired </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Boss and workers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>CEO and shareholders </li></ul></ul></ul></ul></ul><ul><li>2) marry </li></ul><ul><ul><ul><li>“ worker” has personal stake in quality of work </li></ul></ul></ul><ul><ul><ul><li>Reduces transaction costs for repetitive contracts </li></ul></ul></ul><ul><ul><ul><li>Transaction / negotiation costs are much higher for more than 2 adults </li></ul></ul></ul>
  12. 12. Other Gains from marriage <ul><li>4. Risk sharing: Lower cost of job loss </li></ul><ul><ul><li>less likely to suffer financial distress </li></ul></ul><ul><ul><li>better able to diversify employers, investments </li></ul></ul><ul><li>5. Institutional advantages: </li></ul><ul><ul><ul><li>Access to spouse’s health coverage </li></ul></ul></ul><ul><ul><ul><li>Tax benefits or costs? </li></ul></ul></ul><ul><li>6. Consumption complementarities </li></ul><ul><ul><li>activities that are more enjoyable when shared than alone </li></ul></ul><ul><ul><ul><li>Conversation, playing sports, raising kids, sex </li></ul></ul></ul>
  13. 13. Marriage Tax/Subsidy
  14. 14. Marriage Tax/Subsidy Since 1969: tax or subsidy for being married
  15. 15. <ul><li>Married couples with two earners who earn roughly equal incomes pay marriage penalty </li></ul><ul><li>Married couples with only one earner or with one high earner and one who earns little receive marriage subsidy </li></ul><ul><li>Supports traditional family structure </li></ul><ul><li>Black couples more likely to pay penalty - more likely both will work with similar incomes </li></ul><ul><li>Empirical research: effects on decisions to get married are small but statistically significant. </li></ul><ul><li>Marriage tax/subsidy could be eliminated by: </li></ul><ul><ul><li>Taxing individuals rather than families </li></ul></ul><ul><ul><li>Get rid of progressive tax (flat tax) </li></ul></ul>Marriage Tax/Subsidy
  16. 16. <ul><li>Married males earn 10 - 40% more than single males with the same education, age </li></ul><ul><li>Possible explanations: </li></ul><ul><ul><li>Marriage leads to higher productivity at work </li></ul></ul><ul><ul><ul><li>division of labor- wife specializes in nonmarket work </li></ul></ul></ul><ul><ul><ul><li>Greater incentive to acquire human capital </li></ul></ul></ul><ul><ul><ul><ul><li>Need to help support a family </li></ul></ul></ul></ul><ul><ul><ul><li>Lower cost to acquire human capital </li></ul></ul></ul><ul><ul><ul><ul><li>Face a lower interest rate, wives can help finance education </li></ul></ul></ul></ul><ul><ul><li>Highly productive men more likely to marry </li></ul></ul><ul><ul><ul><li>men who are married differ from those who are not </li></ul></ul></ul><ul><ul><ul><ul><li>responsible, motivated, etc. </li></ul></ul></ul></ul><ul><ul><li>Employer discrimination against gays </li></ul></ul><ul><ul><ul><li>Single men may be gay </li></ul></ul></ul><ul><li>Evidence supports productivity effect </li></ul><ul><ul><li>premium larger for men with wives that do not work </li></ul></ul><ul><ul><li>premium rises with length of marriage </li></ul></ul>Gains from marriage: 7. Marriage Wage Premium for Men
  17. 17. <ul><li>What about married females’ wages? </li></ul><ul><ul><li>Family pay gap: </li></ul></ul><ul><ul><ul><li>Lower wages for married women. </li></ul></ul></ul><ul><ul><ul><li>Lower wages for mothers. </li></ul></ul></ul>
  18. 18. Utility of marriage <ul><li>90% of adults marry eventually </li></ul><ul><ul><li>most people expect marriage to make them better off </li></ul></ul><ul><li>I get married if my </li></ul><ul><li>Utility(married) > Utility(not married) </li></ul><ul><ul><li>OR </li></ul></ul><ul><li>Given I am married, we conclude my </li></ul><ul><li>U(married) > U(not married) </li></ul><ul><li>Observe: most U.S. households contain > 1 person </li></ul><ul><li>Conclude: </li></ul><ul><ul><li>U(living with people) > U(living alone) </li></ul></ul><ul><li>This is revealed preference </li></ul>
  19. 19. Marriage Trends <ul><li>Single women as % of all women </li></ul><ul><li>2007: 51% 1960: 34% </li></ul><ul><li>College educated women of all races </li></ul><ul><ul><li>more likely to marry </li></ul></ul><ul><ul><li>marry, on average, two years later </li></ul></ul><ul><li>Delaying motherhood </li></ul><ul><ul><li>For every year by which a woman delays having first child, her lifetime earnings rise by 10% </li></ul></ul><ul><li>Marriages don’t last as long </li></ul><ul><ul><li>Rising divorce rates, rates of re-marriage </li></ul></ul><ul><li>Cohabitation </li></ul><ul><ul><li>10% of adults 25-29 </li></ul></ul><ul><li>Same-sex couples </li></ul><ul><li>Single parenthood </li></ul><ul><li>Affects well-being -U.S. poverty rate overall: 12% </li></ul><ul><ul><li>married couples: 5.5% </li></ul></ul><ul><ul><li>female-headed households: 26% </li></ul></ul>
  20. 20. Theories of Marriage <ul><li>Economists’ way of thinking about marriage: </li></ul><ul><ul><li>Marriage like a firm </li></ul></ul><ul><ul><ul><li>Merger between firms eliminates cost of negotiating contracts </li></ul></ul></ul><ul><ul><ul><li>Allocate scarce resources of money, time </li></ul></ul></ul><ul><ul><ul><ul><li>Work vs household production </li></ul></ul></ul></ul><ul><ul><ul><li>Partners make marriage specific investment, acquire firm-specific capital </li></ul></ul></ul><ul><ul><ul><ul><li>Children – less valued by other partners </li></ul></ul></ul></ul><ul><ul><li>Marriage like a city </li></ul></ul><ul><ul><ul><li>Produce and consume public goods </li></ul></ul></ul><ul><ul><li>Marriage like two persons bargaining </li></ul></ul><ul><ul><ul><li>Bargain over who spends money, does housework or enjoys leisure, gets more favors </li></ul></ul></ul><ul><ul><ul><li>More bargaining power if </li></ul></ul></ul><ul><ul><ul><ul><li>Higher wage </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Better utility in case of divorce (=threat point in bargaining game) </li></ul></ul></ul></ul>
  21. 21. <ul><li>% married has fallen for all women </li></ul><ul><ul><ul><li>driven by “never married” more than divorce </li></ul></ul></ul><ul><ul><ul><li>96% of married black women have black husbands </li></ul></ul></ul><ul><ul><ul><li>96% of married white women have white husbands </li></ul></ul></ul><ul><ul><ul><li>College-educated people are more likely to marry other college-educated people </li></ul></ul></ul><ul><ul><li>% never-married age 40-44: </li></ul></ul><ul><ul><ul><li>White: 9% </li></ul></ul></ul><ul><ul><ul><li>Black: 30% </li></ul></ul></ul>
  22. 22. <ul><li>Modern marriage is less child-centric </li></ul><ul><li>Now 41% of married couples have their own children present in their household </li></ul><ul><ul><li>Use to be 75% in 1880 </li></ul></ul>
  23. 23. <ul><li>Kids in 2-parent HHs as % of all kids: </li></ul><ul><ul><li>1960: over 90% </li></ul></ul><ul><ul><li>2000: 67% </li></ul></ul>
  24. 24. Decline in marriages: Explanations <ul><ul><li>Gains to specialization fall </li></ul></ul><ul><ul><li>skills and wages are more alike for men and women </li></ul></ul><ul><ul><li>Fewer reasons to specialize </li></ul></ul><ul><ul><ul><li>cheap clothes, dishwashers, washing machines, Roomba </li></ul></ul></ul><ul><li>Less-skilled men have fared worse in labor markets since 1970s </li></ul><ul><ul><li>lower real wages </li></ul></ul><ul><ul><li>higher unemployment </li></ul></ul><ul><ul><li>women less willing to marry men w/out job prospects </li></ul></ul><ul><li>Wages for women have risen </li></ul><ul><ul><li>opportunity cost of women staying out of the labor market to be home with children is higher. </li></ul></ul><ul><ul><li>increasing gains to being single, </li></ul></ul><ul><ul><li>decreasing supply of women to marriage </li></ul></ul><ul><ul><li>wage increase for Black women has been larger </li></ul></ul>
  25. 25. <ul><li>Amount of household production time declined </li></ul><ul><ul><li>Mechanization: washers, mixers </li></ul></ul><ul><ul><li>More variety and cheaper market goods: frozen meals, takeouts </li></ul></ul><ul><ul><li>Led to decline in marriage-specific investment by women </li></ul></ul><ul><li>Rising life expectancy </li></ul><ul><ul><li>more potential years in the labor force </li></ul></ul><ul><li>Decrease in infant mortality </li></ul><ul><li>Fewer couples have children – lower cost of divorce </li></ul><ul><li>Less stigma from single parenthood. </li></ul><ul><li>Contraceptive pill </li></ul><ul><ul><li>easier to get sex outside of marriage </li></ul></ul><ul><li>Welfare reduces marriage rates? </li></ul><ul><ul><li>Benefits only given to single-parent families; usually with limited labor market skills </li></ul></ul>Decline in marriages: Explanations
  26. 26. Decline in marriage for black women <ul><li>Declining labor market position of black men </li></ul><ul><ul><li>Lower real wages and employment rates of less skilled/less educated men - less attractive as marriage partner </li></ul></ul><ul><li>Incarceration </li></ul><ul><ul><li>2 million men in US prisons and just 100,000 women </li></ul></ul><ul><ul><li>20% of Black men between 35-39 have been in prison, 3% white men </li></ul></ul><ul><ul><li>more black men in prison than have been to college </li></ul></ul><ul><li>Low supply of young black men  strong bargaining position of men  why marry? </li></ul><ul><li>Lower bargaining power of women: more likely to </li></ul><ul><ul><li>work </li></ul></ul><ul><ul><li>go to college </li></ul></ul><ul><ul><li>be a single mom </li></ul></ul>
  27. 27. Divorce <ul><li>Revealed preference : rising divorce rate  better off divorced than married </li></ul><ul><li>Economic consequence of divorce </li></ul><ul><ul><li>women’s economic status falls by 20-25% </li></ul></ul><ul><ul><li>men’s economic status rises by 10% </li></ul></ul><ul><li>Current divorce or separation probabilities : </li></ul><ul><ul><li>Within 5 years: 20% </li></ul></ul><ul><ul><li>Within 10 years: 33% </li></ul></ul><ul><ul><li>Within 20 years: 50% </li></ul></ul><ul><li>Probability of divorce affected by gender mix of children </li></ul><ul><li>No-fault divorce </li></ul><ul><ul><li>since 1970, 46 states, requires no finding of fault </li></ul></ul><ul><ul><li>led to lower divorce settlements for women (property, alimony) </li></ul></ul><ul><li>Unilateral divorce </li></ul><ul><ul><li>does not require explicit consent of both parties </li></ul></ul><ul><ul><li>In states with unilateral divorce, adjusting for the relevant demographics, a couple is 6% less likely to have a child </li></ul></ul><ul><li>Covenant marriage contracts </li></ul>
  28. 28. What drives modern marriage? <ul><li>Consumption complementarities </li></ul><ul><ul><li>activities that are more enjoyable when shared than alone </li></ul></ul><ul><li>Increasing the financial stability leads to marriage </li></ul><ul><ul><li>rather than marriage leads to financial stability </li></ul></ul><ul><li>Cohabitation vs Marriage: Why marry? </li></ul><ul><li>Marriage more attractive for women than for women? </li></ul>