Chapter 3 Labor Force Participation

1. Chapter 3 Labor Force Participation • Review definitions: • employed: actually holds a paid job. • Unemployed: no paid job but actively seeking work. • Out of labor force: no job and not looking. • LFP: labor force participation. • Current Population Survey (CPS): monthly survey of US households.

2. Figure 3.1 • Shows LFP trend from 1950 to 1998 for entire population, then broken down by sex. • Overall: • Men: • Women:

3. Modeling the Decision to Work • Corner Solution: In some circumstances, with a given market wage, nonlabor income, and set of preferences, the utility-max hours choice will be zero hours. • At this corner solution: • MRS  wage.

4. Reservation Wage • Reservation wage = WR = the wage at which the individual is indifferent between working and not working. • Measure WR : • LFP rule: mkt W  WR

5. Effect of Wage on LFP • Start out of LF: WM WR. • As WM  it approaches WR until it reaches WR, at which time the person is indifferent between working and not working. • So:  WM   probability of being in the LF. • Note: this  WM causes a pure substitution effect so result is clear (no income effect).

6. More on W  and LFP • * LFP more responsive to  W than hours worked because LFP responds with pure substitution effect causing  probability of LFP, while hours worked has both effects. • LFP wage elasticity is greater than hours elasticity. • * Estimated LFP elasticities always positive, even for men. • If start in LF: a  W could cause person to stop working.

7. Effect of Y on LFP • As income es, the point on the indifference curve where the optimal point occurs es too, so the MRS is ing. This means even with no  W, the MRS can  so that the comparison between W and MRS can result in a  in LF state. • The  Y causes the optimal point to move up to a steeper portion of the indifference curve where MRS is bigger. • Show on graph by tracking MRS at different income levels.

8. Deficiencies in Formal Labor/Leisure Model • 1. Ignores family context • 2. Ignores unpaid work or nonmarket home time. • Two trends have  importance of these deficiencies: • 1.  female LFP (even married) • 2.  men’s involvement in home work activities. • See the Family Model.

9. Family or Household Model • Key extension: each potential worker has 3 uses of time: • market work • home work • leisure • Decision-making unit is the family. • Effect of  Y on family’s time allocation: •  Demand for leisure, so  hours in other two categories.

10. Effect of  Wage on Labor Supply • Assume husband and wife: person 1 and person 2. • If W of person 1: income and substitution effects for this person, plus cross-income and cross-substitution effects for spouse very complicated! • * • Key is relationship between husband and wife’s time:

11. Empirical Evidence • What do empirical studies tell us about whether spouses’ time are substitutes or complements (I.e., what is sign of the cross-effects): Key is presence of children in the household. • No kids: • Yes young kids:

12. Relate Back to LFP Trends • Remember: over time, male LFP  while female LFP: • LFP rule: choose to participate in LF if Wmkt  WR • Verbally: each spouse works an extra hour for pay if Wmkt  than time in leisure OR home work. • Men: • * • * • *

13. Continue • Women: relatively low wages; few substitutes for home-produced goods like meals, cleaning, and childcare. • Key Point: With a W, men mostly moving between paid work and leisure, while women are moving between paid work, leisure, and home work. • So women have bigger substitution effect  explains why substitution effect more likely to dominate for women.

14. Becker’s Time Allocation Model • Key: Final consumption goods are what give individuals utility; These final consumption goods can be produced with some combination of paid goods and home-produced goods. • Time is an input in this process of producing final consumption goods. • Final consumption goods include true leisure activities that generate utility. • So: W substitute AWAY from both home-production and time-intensive leisure time.

15. More Detail on  Male LFP • Review male LFP trend: • At same time: real wages grew about 45%  Y effect has dominated substitution effect. • See Figure 3.5: Age-participation profiles:

16. Decompose the  Male LFP into different age groups • This decline seen mostly in: • 1) young men (ages 16-24) • 2) prime-aged men (ages 45-64) • 3) men at retirement age (age 65+). • Four factors: • 1)Life-cycle allocation of time • 2) Social Security/Private pension plans • 3) Growth in disability benefits • 4) Decreased demand for low-skilled workers. • Some factors specific to a single age-range; some are broader.

17. Life-Cycle Allocation of Time • More complex model required: when I decide hours worked today, I care about hours I hope to work in the future as well. • Key is time trend in wages: • For an individual across a lifetime • Rewards to work greatest at midlife • Shifting average profile over time • Economic growth causes  wages over time for all ages (shift in entire age-wage profiles)

18. Life-Cycle Effect Broken Down by Age • For Ages 65+: At some age, real wages actually  • For young men: reallocation of time from work to school because bulk of job growth in high-skill jobs (called investment in human capital) • Why done early in life? • Wage lower • HK investment has more years to get payoff.in higher wage.

19. Effect of Social Security and Private Pensions • Trend: coverage and  benefits for both plans. • Effect of SS: • SS changing over time: age is  • Private Pensions: Two types: • Defined Benefit: • Defined Contribution:

20. Decline LFP of Prime-Aged Men • Two reasons: • 1) growth in disability benefits • 2)  demand for low-skilled jobs • Disability Benefits: Part of SocSec: SSDI; Big  # recipients and monthly benefit. • Demand for low-skilled jobs: hits older workers worse since no time for substantial HK investment. Lost Y from not working has fallen. • Differences by race: • African-Americans hit harder by disability and disproportionately represented in low-skill jobs.

21. Female LFP Rates • Remember the big increase over time in female LFP rate: • Percentage of total US labor force that is female: • * • * • * • Today, more than 50% of mothers with preschool children are in paid LF

22. To Note in Figure 3.7 • Age-LF Participation profiles for women in 3 years: • Two major features: • 1)  female LFP for all age groups up to 65 • 2) ing LFP pattern for women in childbearing years. • Currently:: still bit of peak at age 24, but then stays fairly high.

23. 6 Reasons for  Female LFP • 1. Rising real wages. • 2. es in fertility patterns. • 3. es in educational attainment. • 4. ing living standards. • 5.  job opportunities. • 6. ing social attitudes.

24. Details for the 6 Reasons • Reason #1:  real wages: for females, substitution effect is dominant, causing  LFP. • Reason #2: Fact: having young children increases value of nonmarket time. • What has ed? • (i) #kids per mother has declined. Why?

25. Continue with #2: • (ii) postponement of childbirth for many women: • * • * • Key: hard to establish career while also having young children. So some have kids later; some have no kids at all. • 1992 survey of female executives: 42% had no kids

26. continue • Third component of changing fertility patterns: • More women continue to work even when children are young • * • * • One result: dramatic increase in utilization of non-maternal child care

27. Education Changes • This is reason #3: • Changes in Educ. Attainment: Big increase in women getting 4-year college degree. • Anyone with college degree: more likely to be in paid LF; why? • * • * • *

28. Continue • High divorce rates tend to  education as means to economic independence. • Also: es in Field of Study: • * • * • *

29. Reason #4: Living Standards • Theory:  female LFP so that family can maintain a good standard of living, even though: • Male wage growth for college-educated workers declined in 70s and 80s; • For unskilled workers, real wages actually fell.

30. Reason #5: Increased Job Opportunities • In past 50 years, “female” jobs have experienced above-average job growth. • In 1997, over half of working women in 6 occupations: • Administrative support • Food preparation services • Sales clerks in retail trade • Teachers • Secretaries and typists • Nurses

31. More on Reasons • Also:some females moving into previously male-dominated occupations. • * • * • Reason #6: Changing social attitudes: • If wife works, no longer conclude that husband is a failure. • More acceptance of child care.

32. All 6 Factors Related • Not possible to know what caused what. • Were the rising real wages most important? • Did more women working cause the shifting in social attitudes? • One way to disentangle different factors is to compare LFP trends across countries.

33. From Figure 3.8 • Four industrialized countries. • Sweden similar to U.S.: big  female LFP. • Germany and Japan : some fluctuation but no overall . • Average female real wage grew much in all four countries; suggests other factors have some importance too.

34. Japan and Germany • Japan: decline in agriculture, a “female” occupation. • Germany: LFP patterns differ for different subgroups ( young single women;  for married women). • Social attitudes very different: • Japan: explicit discriminatory hiring policies • Germany: unlike U.S., did not use females to combat acute labor shortage in defense industry in WWII

35. Bargaining Model of Female Labor Supply • More institutional version of the HH model. • Key factor: family decisions reflect family’s power structure: if husband earns all money, he has all power. • As better job market opportunities opened up for women and social attitudes changed, their LFP  and so power in family shared more equally.

36. LF During Recessions • Issue: During recession, does LF expand or contract? Two forces work in opposite directions. • Added Worker Effect: temporary entrance into LF of “secondary” workers in response to unemployment of primary household worker. (Due to Y effect.) • Discouraged Worker Effect: laid off worker leaves LF. Real LFP decision rule is: compare WR and expected wage, where E(W) is less than actual WM due to low chance of getting job. Dominant effect in recession.