Chapter 3 The Household

1. Chapter 3 The Household • Households in the U.S. • The Economics of the Household • Marriage & Divorce

2. I. Households (HH) in the U.S. • 290 million people (2001) • 109 million HH • HH is people who occupy same housing unit (house, apt. , dorm room) • Family HH includes related people

8. II. The Economics of the HH • Decision to form a household • Weigh benefits and costs • Form HH if benefits > costs • Over 75% of HH contain more than 1 person • So must be benefits to forming multiperson HH • focus on multiperson HH

9. Benefits/Costs to HH • Economies of scale • Externalities • Transactions costs • Risk sharing

10. Economies of scale • mostly a benefit • Things done on a large scale can be done more efficiently • Many HH chores done for 1 person, are just as easy to do for 2 or 3 people

11. examples • Cooking for 1 vs. 2 • Cleaning, shopping, laundry • In HH with more than 1 • Less time spent PER PERSON on these tasks • Tasks are shared

12. Buying in bulk • Share fixed costs of HH • Furniture • Appliances • Bills (phone, cable…)

13. if HH is really large, • diseconomies of scale as tasks take longer

14. Externalities • a benefit or cost • consumption or production of a good or service, affects well-being of others (not just producer or buyer)

15. positive externalities • benefits to living in HH • enjoy roommate’s good cooking • enjoy listening to roommate’s CD • roommate rents movie, you watch it too

16. negative externalities • a cost to living in a HH • roommate • smokes • snores • is noisy • has bad taste in music, decor, …

17. transactions costs • cost of acquiring goods & services • cost of enforcing agreements • may be benefit or cost to HH living

18. lower transactions costs • divide errands, chores • higher transactions costs • keeping track of who owes what • coordinating schedules

19. Risk • HH with multiple earners less likely to suffer financial distress • HH with multiple earners better able to diversify • employers • investments

20. Division of Labor • we observe • men tend to be larger earner in HH (sole earner 22% of HH) • women in HH spend more time on housework, childcare, etc

21. men specialize in market work • paid work • women specialize in nonmarket work • unpaid work • not necessarily complete specialization

22. how do we build a model to explain this? • gains from specialization & trade

23. example: Ed & Liz • choose between market & nonmarket work • Liz • $500 week in market work OR • $400 week in nonmarket work OR • something in between

24. Ed • $1000 week in market work OR • $420 week in nonmarket work OR • something in between

25. Ed market 1000 500 Liz 420 400 nonmarket

26. Ed has absolute advantage in BOTH market & nonmarket work • 1000 > 500 • 420 > 400 • why did he marry Liz? • still gains from specializing & sharing output

27. comparative advantage • Liz is close to Ed in nonmarket production • but way worse in market production • Liz has comp. adv. in nonmarket work • gains to specializing

28. case 1: Ed & Liz do not share • time divided • 60% market work • 40% nonmarket work • do not share

29. Liz • $300 in market work • $160 in nonmarket work • Ed • $600 in market work • $168 in nonmarket work

30. market 1000 500 420 400 nonmarket

31. case 2: Ed & Liz specialize • Ed does market work • gives Liz 35% • Liz does nonmarket work • gives Ed 50%

32. results • Ed • produces $1000 • gives Liz $350, keeps $650 • Liz • produces $400 • gives Ed $200, keeps $200

33. Ed • $650 market, $200 nonmarket • (case 1: $600, $168) • Liz • $350 market, $200 nonmarket • (case 1: $300, $160)

34. market 1000 Ed Liz 500 420 400 nonmarket By specializing, both Ed and Liz do better

35. why does this work? • each specialize in what they do best, • relative to their partner • Liz specializing in nonmarket work frees Ed to specialize in market work • which he does way better

36. specialization does NOT have to be complete for there to be gains • 56% of married households both spouses in labor force

37. if men tend to have ab. or comp. adv. in market work, • see men specializing in mkt. work, • women specializing in nonmkt. work

38. men have absolute adv. in market work because they earn more • gender earning gap reinforces the gender earnings gap

39. application • we observe that married men earn more than unmarried men • 10-25% more when controlling for other differences (like age, education…) • “marriage premium”

40. why? • division of labor • married men have wife to specialize in nonmarket work (better focus on market work)

41. marriage is a signal: • employer prefers married men, • seen as more responsible, etc. • self selection: • people who get married tend to be more responsible, etc. in the first place

43. drawbacks to specialization • affects “power balance” in HH • does partner that earns the $ get to make the decisions • divorce • partner specializing in nonmarket work at a disadvantage

44. nonmonetary issues • value of family time • stress & illness

45. III. Marriage & Divorce • marriage is a contract for HH formation • specialization more likely • marriage has origins as economic arrangement

46. divorce & specialization • if spouse specialized in nonmarket work, • necessary to place value on that contribution

47. No Fault divorce • obtain divorce without cause • obtain divorce without consent of spouse • arose in 1970s • cause or consequence of rising divorce rates?

48. Consequences • less costly to break marriage contract • alimony for women much less common • spouses have less leverage to extract financial settlement

49. 1985 Weitzman • economic consequences of divorce • women’s income decreases 27% • men’s income increases 10% • consequences of women specializing in nonmarket work

50. 1999 Braver • women’s income decreases 1% • men’s income increases 2% • today women more likely to be in the labor force • better child support enforcement