The Allocation of Time between the Household & the Labor Market

1. The Allocation of Time between the Household & the Labor Market

2. Labor Force Definitions • Age-Eligible • Population • LFP rate • Labor Force • Not in the Labor Force • unempl rate • Unemployed • Employed

3. What is the age-eligible population? • It consists of all people who are 16 years or older and not institutionalized. • So a boy who is 15 years old and has a paper route is not included in the age-eligible population. • However, a woman who is 85 years old is included, unless she is in a nursing home (institutionalized). • Other institutionalized individuals who are not part of the age-eligible population are those who are in jail.

4. The Labor Force consists of the Employed and the Unemployed •  Who are the employed? • Those who worked for pay during the week of the survey. This includes both part-time and full-time workers. • Those who did not work because of vacation, illness, etc. • Those who work 15 hours or more as an unpaid worker in a family business. •  Who are the unemployed? • Those on layoff waiting to be recalled. • Those not working, but actively seeking a job. • Those waiting to report to a new job within 30 days.

5. Unemployment Rate # of unemployed people = ------------------------------------ # of people in the labor force# of unemployed = ------------------------------------------ # of employed + # of unemployed

6. Example • Suppose a population has 95,000 employed people and 5,000 unemployed people. What is the unemployment rate? • Unemployment Rate • # of unemployed = --------------------------------------------- # of employed + # of unemployed • 5,000 5,000 = ------------------- = ------------- 95,000 + 5,000 100,000 • = .05 or 5 %

7. Who is in the age-eligible population but not in the labor force? • People who are neither “employed” nor “unemployed.” • For example, homemakers who do not work outside the home are not in the labor force. • Full-time students who do not have a job are also not in the labor force. • Retired people are also not in the labor force.

8. Labor Force Participation Rate • The percentage of the age-eligible population that is in the labor force (either employed or unemployed).

9. Trends in Labor Force Participation Rates 1947-2011 • The LFP Rate of men has declined. • The LFP Rate of women has increased a lot.

10. LFP Rates for Men by Age • Men’s LFP rates have been falling, especially for younger and older men.

11. LFP Rates for Women by Age • Women’s LFP rates have been rising especially for women aged 25-54.

12. LFP Rates of Men by Race/Ethnicity • Black men tend to have lower labor force participation rates than white men. • Hispanic men (who can be of any race) tend to have higher labor force participation rates than other white and black men.

13. LFP Rates of Men by Race/Ethnicity

14. The LFP rates are higher for those with more education. Holding education constant, the LFP rates of black men are still lower than those of white men.

15. LFP Rates of Women by Race/Ethnicity • Black women tend to have higher labor force participation rates than white women. • Hispanic women (who can be of any race) tend to have lower labor force participation rates than other white and black women.

16. LFP Rates of Women by Race/Ethnicity

17. The LFP rates are higher for those with more education. Holding education constant, the LFP rates of black women are again higher than those of white women.

18. The Labor Supply Decision • Utility or satisfaction depends on the consumption of nonmarket time and market goods (which are purchased with earnings or other income). • The decision to work is a choice between nonmarket time and working for pay. • Analyze the decision by looking at the demand for nonmarket time which is a normal good. The remaining hours in a day are available for work.

19. Determinants of Demand for nonmarket time • Opportunity cost (usually the market price) • Level of wealth • Preferences

20. Budget Constraint • The amount of market goods you can afford to consume (C) depends on • your wage (w), • your hours worked (h), and • your other income (V), such as spouse’s earnings, interest, dividends, or rental property earnings. • C = wh + V

21. Budget Constraint: C = wh + V • Suppose a woman has 16 hours to allocate to market or nonmarket time each day. Her nonlabor income is $70/day and her potential wage is $7.50. • Income or Mkt Goods • 190 • Slope = - w or -wage rate • 70 • nonmarket time/day • 0 • 16

22. Budget Constraint: C = wh + V • If she allocates all her time to nonmarket activities, she will have 16 hours of nonmarket time and only her nonlabor income of $70/day to spend on market goods. • Income or Mkt Goods • 190 • Slope = - w or -wage rate • 70 • nonmarket time/day • 0 • 16

23. Budget Constraint: C = wh + V • If she allocates all her time to market activities, she will have 0 hours of nonmarket time and income of 7.50(16) + 70 = 190/day to spend on market goods. • Income or Mkt Goods • 190 • Slope = - w or -wage rate • 70 • nonmarket time/day • 0 • 16

24. I3 • I2 • I1 • nonmarket time Family of Indifference Curves • Where along the budget constraint will she choose to operate? That depends on her preferences or her indifference curves. • Income or Mkt Goods

25. Determinants of the Slope of the Indifference Curve • Ability to substitute • Tastes and preferences • Income or Mkt Goods • G1 • IB • G0 • IA • LB LA L0 • nonmarket time

26. Ability to Substitute • If time becomes more expensive, people make two types of substitutions. They substitute in consumption – by consuming goods that are less time intensive and more goods intensive (ex: take a shorter but more costly ski vacation instead of a longer but cheaper vacation at the beach). They substitute in production – producing goods in ways that are less time intensive and more goods intensive (ex: use more prepared foods instead of cooking from scratch).

27. Substituting goods for time If substitution is relatively easy, so the tradeoff of nonmarket time for market goods is not very costly, the indifference curve will be flatter (goods/ time is small). • Income or Mkt Goods • IB (flatter ICs) • 130 • IA (steeper ICs) • 16 • 8 • nonmarket time

28. Tastes and Preferences • Some people’s tastes and preferences are such that the amount of market goods that they need to compensate for nonmarket time is relatively high (goods/ time is large). They have steep indifference curves. Since they need a lot of market goods to compensate for nonmarket time, they need a high wage to get them into the labor market. The wage that is just sufficient to get them into the labor market is their reservation wage.

29. Income or Mkt Goods • IB (flatter ICs) • 130 • IA (steeper ICs) • nonmarket time • 16 • 8 Tastes and Preferences • People with higher tradeoffs of market goods for nonmarket time have higher reservation wages and steeper indifference curves than people with lower tradeoffs.

30. Impact of nonlabor income on labor force participation • If nonlabor income increases, the budget constraint shifts upward by the amount of the increase. An individual will consume more of all normal goods, including their own nonmarket time. • Income or Mkt Goods • 90 • 70 • A • nonmarket time • 16 • 8 11

31. Change in the Wage Rate • An increase in the wage rate increases the steepness of the budget constraint. • Income or Mkt Goods • nonmarket time

32. What is the effect of an increase in the wage rate on hours worked? • Higher wage rate has two effects operating at the same time: • Income effect: • wage  income   consume more of normal goods including your own nonmarket time • Substitution effect: • wage nonmarket time is relatively more expensiveconsume less nonmarket time

33. If the wage increases … • and the income effect is larger the substitution effect, the person will work less. • and the substitution effect is larger than the income effect, the person works more.

34. Graph of Income & Substitution Effects • Income Effect is movement from A to B. • Substitution Effect is movement from B to C. • Income or Mkt Goods • C • B • A • nonmarket time

35. Income Effect < Substitution Effect • Nonmarket time has decreased & market time has increased. • Income or Mkt Goods • C • B • A • nonmarket time • LC LA LB

36. Income Effect > Substitution Effect • Nonmarket time has increased & market time has decreased. • Income or Mkt Goods • C • B • A • nonmarket time • LA LC LB

37. Added Worker Effect Suppose a family member is laid off. This causes a decline in your non-labor income and an increase in your labor force participation. Discouraged worker effect During a recession, labor market opportunities are few. So the perceived market wage declines, causing a decline in labor force participation. The Impact of Economic Conditions on Labor Force Participation • While the added worker effect may dominate in one family and the discouraged worker effect dominate in another family, in the aggregate, the discouraged worker effect appears to be greater.

38. Applications of the Theory • Effects on Labor Supply of • Taxes • Child care tax credits

39. Taxes and the Decision to Work • Suppose that Mary has a potential wage of $10 per hour and her household is in a 25% tax bracket. Then Mary’s after-tax wage is only $7.50 per hour. If Mary’s reservation wage is $9 per hour, Mary would have worked for $10 per hour (after taxes) but not for $7.50.

40. Income or Mkt Goods • A • B • nonmarket time Taxes and the Decision to Work • Taxes (or an increase in taxes) flatten the budget constraint shifting it counterclockwise. This person goes from point A to B, dropping out of the labor force.

41. Child Care Tax Credits • When people with young children work, they usually need to pay for child care. This is like having a reduction in their wage. If they receive a child care tax credit it is like increasing their after-child-care wage.

42. Child Care Tax Credits • The tax credit, operating like a wage increase, shifts the budget constraint upward, rotating it clockwise. This person goes from point A to B, moving into the labor force. • Income or Mkt Goods • B • A • nonmarket time

43. Analyzing Trends in LFP of Women • Factors that affect the budget constraint: • Increasing labor market qualifications • - Increase in education • - Increase in experience • Increase in real wage of women. Why have wages increased? • - Increase in productivity (due to technological advance and growth in capital stock) • - Increase employment in those sectors where women are typically employed.

44. Analyzing Trends in LFP of Women • Factors that affect the value of nonmarket time: • Availability of market substitutes and technological change • Tastes for market goods • Decline in birth rate and increase in divorce rate

45. Historical Patterns in Women’s LFP • World War II: Women were encouraged to enter the labor force to fill the vacancies when the men entered the military. • When the war ended, society again frowned upon employment of married women. Day care centers that had been opened during the war were closed.

46. Historical Patterns in Women’s LFP • Post-World War II Baby Boom: While the LFP rates for women under 35 (many of whom had young children) did not increase during the 1940-1960 period, the LFP of women over 35 did.

47. Historical Patterns in Women’s LFP • 1960s-1980s: The LFP of married mothers, including those with small children, rose dramatically. • This is partly due to changes in social attitudes that made women’s participation less sensitive to the presence of small children and their husband’s income and more responsive to their own market opportunities.

48. Historical Patterns in Women’s LFP • 1990s: The participation rates of married women continued to grow but at a slower rate than in the preceding decades. • Participation rates of single mothers with small children increased rapidly. • The latter can be partially explained by the expansionary economy. Single female family heads are disproportionately low skilled and economic expansions disproportionately benefit less-skilled individuals. • Government policies, such as the earned income tax credit, which raised the subsidy received by low-income families with a working adult, also increased the incentive of single mothers to work outside the home.

49. Analyzing Trends in LFP of Men • Factors that affect the budget constraint: • Social Security and private pensions • Disability benefits • More women enter labor market • Increased years of education

50. Analyzing Trends in LFP of Men • Factors that affect the value of nonmarket time: • Decline in marriage and age at marriage • Increase in divorce rate