Family3 Time

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  • 08/31/09
  • 08/31/09
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  • Family3 Time

    1. 1. Male Participation Rates, by Age
    2. 2. <ul><li>Rising real wages and earnings </li></ul><ul><ul><li>Real earnings have risen since 1940 and since the income effect dominates the substitution effect for older males, the participation rate has fallen. </li></ul></ul><ul><li>Social Security and private pensions </li></ul><ul><ul><li>Social Security benefits and coverage has increased over time. </li></ul></ul><ul><ul><ul><li>This non-labor income has encouraged exit from the labor force. </li></ul></ul></ul><ul><ul><li>Private pension coverage has expanded which is another source of non-labor income. </li></ul></ul><ul><ul><ul><li>Pension rules have been changed to encourage early retirement. </li></ul></ul></ul><ul><li>Disability benefits </li></ul><ul><ul><li>The Social Security disability program has become more generous which encourages low wage workers to exit the labor force. </li></ul></ul><ul><li>Life-cycle considerations </li></ul><ul><ul><li>Earnings of workers past their mid 50’s tend to grow slowly or decline. </li></ul></ul><ul><ul><ul><li>Their education and training become more obsolete as well as declines in physical and mental capabilities. </li></ul></ul></ul><ul><ul><ul><li>This lower wage growth encourages workers to substitute retirement for work. </li></ul></ul></ul>Why LFP Rate of Older Males Declined
    3. 3. Female Participation Rates, by Age Most of the rise in participation rate is due to a rise in participation among married women . This is a surprising result since the rise in real wages of married men would have tended to decrease participation rates of married women
    4. 4. <ul><li>Rising real wage rates for women </li></ul><ul><ul><li>The rise in real wages for women has both a Becker income and substitution effect. </li></ul></ul><ul><ul><ul><li>Substitute towards goods in terms of both consumption and production of commodities. </li></ul></ul></ul><ul><ul><ul><li>Small income effect since its effect depends on the number of hours already working. </li></ul></ul></ul><ul><ul><ul><ul><li>It is 0 if not currently working. </li></ul></ul></ul></ul><ul><li>Changing preferences and attitudes </li></ul><ul><ul><li>Career objectives of women have changed over time towards more market work. </li></ul></ul><ul><ul><ul><li>Changed indifference curves to make them flatter. </li></ul></ul></ul><ul><li>Rising productivity in the household </li></ul><ul><ul><li>Technology improvements have reduced the time necessary for household production and freed time for market work. </li></ul></ul><ul><ul><ul><li>Microwaves, vacuum cleaners. </li></ul></ul></ul>Why the Participation Rate of Females has Risen
    5. 5. <ul><li>Declining birthrates </li></ul><ul><ul><li>Presence of pre-school is associated with lower participation rates and the one-half decline in the birth rate and has freed time for market work. </li></ul></ul><ul><ul><ul><li>High wages tend to lower the birth rate since it raises the opportunity cost of children. </li></ul></ul></ul><ul><ul><ul><li>The impact of children on participation has declined over time. </li></ul></ul></ul><ul><li>Rising divorce rates </li></ul><ul><ul><li>The rise in the divorce rate has increased the incentive for women to participate in order to protect themselves against the impact of a potential divorce. </li></ul></ul><ul><li>Expanding job accessibility </li></ul><ul><ul><li>There has been expansion in employment in jobs traditionally held by women. </li></ul></ul><ul><ul><li>The availability of part-time jobs has increased making it easier for women to work. </li></ul></ul>Why the Participation Rate of Females has Risen
    6. 6. <ul><li>Attempts to maintain living standards </li></ul><ul><ul><li>In the last 20 years, the earnings of males has been stagnant and falling in some cases. </li></ul></ul><ul><ul><li>Married women may have increased their participation to maintain the family’s living standard. </li></ul></ul><ul><li>Relative importance </li></ul><ul><ul><li>Likely the most important explanations are the rise in the real wage rate and the expansion of “women’s jobs.” </li></ul></ul><ul><ul><ul><li>The timing is off for the attitudes and anti-discrimination laws. </li></ul></ul></ul><ul><ul><ul><li>The technology innovations and lower birth rates may the result rather than the cause of the higher participation rates. </li></ul></ul></ul>Why the Participation Rate of Females has Risen
    7. 7. Female Participation Rates, by Race
    8. 8. Male Participation Rates, by Race
    9. 9. <ul><li>Demand-side factors </li></ul><ul><ul><li>African-American males face worse labor market conditions due to lower education, discrimination, and mismatch between location of jobs and residence. </li></ul></ul><ul><li>Supply Side </li></ul><ul><ul><li>Non-market income sources such as Social Security and public assistance are more appealing to African-American males since have lower wages. </li></ul></ul><ul><ul><li>Illegal activities may be also more attractive. </li></ul></ul><ul><li>The health of older African-American males tends to be worse than for older white males. </li></ul><ul><li>High participation rate of African-American wives may lower the participation rate of African-American husbands. </li></ul>Lower Participation Rate for African-American Males
    10. 10. <ul><li>The business cycle has two offsetting impacts on participation. </li></ul><ul><ul><li>The added-worker effect occurs when the primary earner loses his or her job and other family members look for a job to offset the decline in family income. </li></ul></ul><ul><ul><ul><li>This because the other family members suffer a decrease in their non-labor income. </li></ul></ul></ul><ul><ul><li>The discouraged -worker effect occurs when a person stops looking for work because they become very pessimistic about finding a job. </li></ul></ul><ul><ul><ul><li>Recessions lower wages and thus the “price” of leisure and so some workers substitute leisure for job search. </li></ul></ul></ul><ul><li>The discouraged worker effect outweighs the added worker effect and so the labor force shrinks in recessions. </li></ul><ul><ul><li>The added worker effect applies only to families where the primary earner is unemployed, while the discouraged worker effect may impact all workers. </li></ul></ul><ul><ul><li>Some married women are only marginally attached to the labor force. </li></ul></ul>Cyclical Changes in Participation
    11. 11. Why Have Hours of Work Remained Stable since 1945
    12. 12. <ul><li>Rise in real wages since 1945 should have decreased weekly work hours due to the income effect. </li></ul><ul><li>A leading explanation is the rise in education levels has offset the impact the rise in real wages. </li></ul><ul><ul><li>More education may reflect more job commitment </li></ul></ul><ul><ul><li>Educated worker have nicer working conditions and thus less desire to reduce hours. </li></ul></ul><ul><ul><li>Educated workers have more fixed costs per worker (e.g. training) and thus firms resist reductions in hours per week (costs per hour rise). </li></ul></ul><ul><li>Other factors include higher tax rates, and overtime pay premiums </li></ul><ul><li>Americans face a “time squeeze” since total hours worked per person has risen. </li></ul><ul><ul><li>Partly due to rise in share of prime-age workers who work more hours. </li></ul></ul><ul><ul><li>Much of the rise has been voluntary since highest paid jobs have had biggest rise. </li></ul></ul><ul><ul><li>Hours of leisure have risen not fallen. </li></ul></ul><ul><ul><ul><li>Household production time has fallen. </li></ul></ul></ul>Are Americans Overworked?
    13. 13. Household production and Technology <ul><li>Technology made women more productive in HH, </li></ul><ul><li>but also makes long hours on household production unnecessary </li></ul><ul><li>in total </li></ul><ul><ul><li>first hours of H highly valued </li></ul></ul><ul><ul><li>additional hours much less valued </li></ul></ul><ul><li>20 th century time savers: </li></ul><ul><ul><li>dishwasher </li></ul></ul><ul><ul><li>vacuum </li></ul></ul><ul><ul><li>microwave </li></ul></ul><ul><ul><li>refrigerator </li></ul></ul><ul><li>shift some hours spent on housework to either </li></ul><ul><ul><li>leisure </li></ul></ul><ul><ul><li>work </li></ul></ul>
    14. 14. Unemployment Rate
    15. 15. <ul><li>Households produce utility-yielding commodities with combinations of market goods and time. </li></ul><ul><ul><li>Examples of commodities: meal, clean house, entertainment, quality of children </li></ul></ul><ul><li>Three uses of time </li></ul><ul><ul><li>Labor market time (generates income to buy market goods) </li></ul></ul><ul><ul><li>Household production time </li></ul></ul><ul><ul><li>Leisure time </li></ul></ul><ul><li>Uses of time are competitive with each other </li></ul><ul><ul><li>Work takes away time from household production and leisure </li></ul></ul><ul><li>Tradeoff </li></ul><ul><ul><li>more hours worked, more $ to buy stuff </li></ul></ul><ul><ul><li>but less time for leisure and household production </li></ul></ul>Model of the allocation of time
    16. 16. Allocation of time <ul><li>Marginal decision-making </li></ul><ul><ul><li>Should I  work hours by 1 (and therefore  leisure by 1)? </li></ul></ul><ul><ul><li>Answer: I will  work by 1 hour as long as the market values my time more than I do. </li></ul></ul><ul><li>Market time valuation : wage </li></ul><ul><ul><li>Individual has no influence on market wage </li></ul></ul><ul><li>Leisure time valuation : How I am willing to trade off work/leisure </li></ul><ul><li>Factors that affect decision </li></ul><ul><ul><li>own preferences for work vs leisure, market wage, and nonlabor income. </li></ul></ul><ul><li>Model assumes individual will maximize utility subject to budget constraints (limits on time, money to spend, etc.). </li></ul>
    17. 17. <ul><li>Time-intensive commodities use a large amount of time and a small amount of goods. </li></ul><ul><ul><li>Watching the sunset. </li></ul></ul><ul><li>Goods-intensive commodities use a small amount of time and a large amount of goods. </li></ul><ul><ul><li>Meal at fast-food restaurant. </li></ul></ul><ul><li>As labor-market time becomes more valuable—substitute time-intensive commodities for goods-intensive ones. </li></ul>Commodity Characteristics
    18. 18. Indifference Curve Leisure Hr Income/day 24 0 Indifference curve shows work and leisure combinations that yield the same amount of total utility. 24 0 Work Hr U <ul><li>Negative slope </li></ul><ul><ul><li>To keep the level of utility the same, some of income must be given up if one wants more leisure </li></ul></ul><ul><li>Convex to origin </li></ul><ul><ul><li>With low hours of leisure, individuals are willing to give up large amount of income to get 1 more leisure hour. </li></ul></ul><ul><ul><li>With high hours of leisure, individuals are willing to give up small amount of income to get 1 more leisure hour. </li></ul></ul>
    19. 19. Budget Constraint Leisure Income/day 24 0 Budget constraint shows the combinations of income and leisure that a worker could get given a wage rate $120 At a wage rate of $5, a worker could get a maximum income of $120 per day ($5/hour * 24 ) At a wage rate of $10, a worker could get a maximum income of $240 per day. At a wage rate of $15, worker could get a maximum income of $360 per day. $240 $360 Slope of budget constraint (rise/run) = wage rate
    20. 20. Utility Maximization Leisure Income/day 24 0 The optimal or utility maximizing point is where the budget constraint is tangent to the highest attainable indifference curve $240 U 1 U 2 U 3 16 $80 A At a wage rate of $10/hour, the optimal hours of leisure is 16 (8 hours of work) at point A $360
    21. 21. Utility Maximization Leisure Income/day 24 0 The optimal or utility maximizing point is where the budget constraint is tangent to the highest attainable indifference curve $240 U 2 U 3 16 $80 A If the wage rate rises to $15/hour, the optimal hours of leisure is 15 at point B B At a wage rate of $10/hour, the optimal hours of leisure is 16 (8 hours of work) at point A 15 $360
    22. 22. Utility Maximization Leisure Income/day 24 0 $240 U 2 U 3 15 16 17 $80 A Income effect is measured through a parallel shift of the old budget constraint, from A to C (from 16 to 17 hours of leisure). Substitution effect is measured by movement along U 3 , from C to B (from 17 to 15 hours of leisure). Net effect is an increase of hours of work by 1 hour. B C Income and substitution effects
    23. 23. <ul><ul><li>Assume Mark has maximized utility subject to his budget constraint so that he is working for pay 40 hours per week with wage = $10/hour. </li></ul></ul><ul><li>What if wage increases to $15/hr ? </li></ul><ul><li>Income effect of higher wage </li></ul><ul><ul><li>higher wage increases income (he is richer) </li></ul></ul><ul><ul><ul><li>Demand for leisure increases, hours of work fall </li></ul></ul></ul><ul><li>Substitution effect of higher wage </li></ul><ul><ul><li>higher wage increases opportunity cost of leisure </li></ul></ul><ul><ul><li>hours of work increase </li></ul></ul><ul><ul><ul><li>Substitute goods for time in production of commodities </li></ul></ul></ul><ul><ul><ul><ul><li>buy more restaurant meals and fewer home-cooked meals. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>fly to vacation rather than drive. </li></ul></ul></ul></ul>Income and Substitution Effects
    24. 24. Effect of Change in Wage on Employment <ul><li>For women: </li></ul><ul><ul><li>Dominant substitution effect, at least at lower wages. </li></ul></ul><ul><ul><li>perhaps income effect has become more dominant in recent years. </li></ul></ul><ul><li>If only working few hours per week: </li></ul><ul><ul><li> wage could cause person to leave labor force. </li></ul></ul><ul><li>If start out of LF and then wage increases: </li></ul><ul><ul><li>Causes only substitution effect so will increase probability of working for pay. </li></ul></ul>
    25. 25. Change in Nonlabor Income <ul><li>Assume : </li></ul><ul><ul><li>Mark has maximized utility subject to his budget constraint so that he is working for pay 40 hours /week with wage = $10/hour. </li></ul></ul><ul><li>Now there is an  nonlabor income (he won a lottery): </li></ul><ul><ul><li>demand for all normal goods including leisure   </li></ul></ul><ul><ul><ul><li> paid work hours. </li></ul></ul></ul><ul><ul><ul><li> probability of working for pay (because it means a higher market wage is required to induce Mark to work for pay). </li></ul></ul></ul><ul><ul><li>Effect is opposite if nonlabor income falls. </li></ul></ul>
    26. 26. Taxes and Labor Supply <ul><li>Progressive tax system based on taxing families instead of individuals means that the earnings of a sequentially secondary earner are taxed at a higher marginal rate. </li></ul><ul><li>Higher marginal tax rate means that household production has lower opportunity cost. </li></ul><ul><li>Lower wage should mean less leisure, if leisure is a normal good. </li></ul><ul><li>Therefore, theoretically, the overall impact on labor supply is ambiguous. </li></ul><ul><li>Empirical research suggests that reductions in tax rates do increase both the hours worked and labor force participation </li></ul>
    27. 27. Income Tax and Individual Labor Supply Leisure Income/day 24 0 <ul><li>An income tax shifts the after- tax wage downward and may either raise or lower a person’s optimal number of hours of work. </li></ul>$240 I 1 I 2 16 U 2 <ul><li>Prior to the income tax, the optimal hours of work is 9 (15 hours of leisure) at point U 1 . </li></ul>15 U 1 $360 <ul><li>The optimal hours of work would increase if the income effect was larger than the substitution effect. </li></ul><ul><li>After the income tax, the optimal hours of work decreases to 8 (16 hours of leisure) at point U 2 . This implies the substitution effect caused by the tax is larger than the income effect. </li></ul>
    28. 28. Leisure Cost of Goods <ul><li>Leisure cost of an $8 movie ticket: how many hours you have to work in order to pay for it </li></ul><ul><li>If wage=$6/hr, work 1 hr 20 min to pay for ticket </li></ul><ul><li>If wage=$16/hr, ticket costs 30 min of leisure </li></ul><ul><li>1908 Ford Model T cost 2 years of average wages. </li></ul><ul><li>1997 Taurus cost 8 months of wages </li></ul><ul><li>Gallon of gas in 1970: 6.6 min, in 1997 5.4 min </li></ul><ul><li>Half-gallon of milk in 1919: 39 min, in 2000: under 7 min </li></ul><ul><li>in 1900 a pair of Levis was 9 hours and 42 min, </li></ul><ul><li>2000: 3 hours and 24 min </li></ul><ul><li>In 1910 a 3-min coast-to-coast phone call: 90 hrs 40 min, today, many people treat such phone calls as free. </li></ul>

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