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Chapter 3. Labor Force Participation. Are people poor because they don’t work?. 81.3% of male headed households participate in the labor force More than 50% of females headed households participate in the labor force What does it mean to be in the labor force??

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Chapter 3

Chapter 3

Labor Force Participation


Are people poor because they don t work
Are people poor because they don’t work?

  • 81.3% of male headed households participate in the labor force

  • More than 50% of females headed households participate in the labor force

  • What does it mean to be in the labor force??

    • Employed or actively seeking work

    • May not be collecting a wage


Sub employed
Sub-employed

  • Discouraged worker

    • Stop looking because frustrated

    • No longer counted as unemployed

    • Can be contagious

  • Underemployed

    • Accept any job

    • Usually in secondary labor market

  • Unemployed

    • Not working but attached to labor force


Why are people sub employed
Why are people sub-employed??

  • Conservatives

    • Poor are unwilling to take any job

    • Have unrealistic job expectations

  • Liberals

    • Poor lack the opportunity or education to get jobs that will assure a decent standard of living


Official definition of unemployed
Official Definition of Unemployed

  • A person 16 years or older is unemployed if he/she

    • Is not currently working

    • Has actively looked for work during the previous four weeks

    • Is currently available for work


Types of unemployment
Types of Unemployment

  • Frictional

    • Arises from normal operations of the labor market

    • Labor markets are dynamic and information is not perfect

    • In between jobs

  • Seasonal

    • Can’t work due to seasonal patterns


  • Structural

    • Imbalance between skills have and those demanded by labor market

    • Lack of proper training

    • Monetary and Non-monetary costs

  • Cyclical

    • Demand deficient unemployment

    • Associated with the business cycle

    • Aggregate Demand: total amount of goods and services demanded by all people

    • Aggregate Supply: Total amount of good and services supplied by all people


Price

AS

AD

AD’

2

5

GDP (in trillions)

Unemployment because need 3 trillion less units of the good


Natural rate of unemployment
Natural Rate of Unemployment

  • Frictional + Seasonal + Structural + Cyclical

  • Estimated at 5%

  • Can this figure ever be zero?

    • No…why??

    • Cyclical is the only type of unemployment that could even in theory be zero


Costs of unemployment
Costs of Unemployment

  • Economic

    • Inefficient because not using all our resources

    • Okun’s Law

      • For every 1% increase in unemployment there is a 2.5% decrease in GDP

    • If we are inefficient where are we on the PPC??

      • Inside the curve

  • Social

    • Loss of self respect, erosion of stable family, more crime, homelessness, discrimination


Roger and me

Roger and me

Pick out as many costs of unemployment as you can…the person with the most will get extra credit!!!


Relative importance of income sources
Relative Importance of Income Sources

  • Differ for poor and non-poor

    • Average incomes differ by $27,396

    • Part of this gap is closed by in-kind transfers

    • Gap can be closed by labor market earnings

    • Poor either not work enough or are paid too little


Nonparticipants
Nonparticipants

  • If you don’t work you run the risk of poverty…but not a simple relationship

    • ½ of nonparticipants are children under age 16

    • 20 million are retired

    • 8 million are over 16 but full time students

    • 10 million are institutionalized, sick or disabled

    • 23 million are women who consider themselves homemakers

    • 6 million are others who just don’t work


Remember duration is important

Remember duration is important

½ of those who experience unemployment stay unemployed for greater than 5 weeks


Review
Review

  • Poor families receive most of their income from work

    • Labor force participation is key

  • Many are sub-employed

    • Discouraged worker, underemployed, unemployed


Is reducing poverty a societal goal
Is reducing poverty a societal goal?

  • Public Policy affects Aggregate Demand

    • If increase AD more jobs

    • No need for more products = surplus

    • Expensive for the firm

    • Must layoff workers to compensate

  • Is there an opportunity cost of unemployment???

    • Yes….inflation


Phillips curve
Phillips Curve

  • Statistical Relationship between unemployment and inflation

    • Not a series of equilibrium points

  • Shows the Short Run tradeoff between unemployment and inflation

  • Can relate to Aggregate Supply Curve


Aggregate supply
Aggregate Supply

Price

AS

Quantity


What are the relationships
What are the relationships??

  • Between Prices and Inflation?

    • Positive

    • Inflation is the rate of change of prices

  • Between Quantity produced and Unemployment?

    • Negative

    • Produce more??? You need more people (unemployment decreases)


Phillips curve1
Phillips Curve

Inflation

Expected

Rate of

Inflation

Natural Rate

Of Unemployment

Unemployment


More phillips curve
More Phillips Curve…

  • Negative relationship between inflation and unemployment

  • What would happen on the Phillips Curve if Aggregate Demand would increase?

    • Move up the curve

    • Because unemployment would decrease

  • What would happen on the Phillips Curve if Aggregate Demand would decrease?

    • Move down the curve

    • Because unemployment would increase


Long run phillips curve
Long Run Phillips Curve

  • Represents equilibrium

  • Vertical at the natural rate of unemployment

Inflation

Unemployment

Natural Rate


In class exercise 9

In-class exercise 9

The Phillips Curve


Phillips curve worked until the early 1970s
Phillips Curve worked until the early 1970s

  • Due to Stagflation

    • High rates of unemployment and inflation from supply shocks

AS’

Price

AS

P2

P1

AD

Quantity

Q2

Q1


Summary
Summary

  • Price increased

    • Inflation did what??

      • Increased

  • Quantity decreased

    • Unemployment did what??

      • Increased

  • Phillips Curve says they should move in the opposite direction!!


So…

  • Phillips Curve still used by economists but less faith is put in it

  • Politicians disagree about it also…

    • Conservatives

      • Slope is steep

    • Liberals

      • Slope is flat

  • Important in decision whether or not to fight inflation


Inflation

Inflation

Unemployment

Unemployment

Liberals (Democrats)

Don’t Fight Inflation

Conservatives (Republicans)

Fight Inflation

Big decrease in inflation with only

Small increases in unemployment

Small decrease in inflation but

Big increases in unemployment


Chapter 4

Chapter 4

The Working Poor


Is it possible to eliminate poverty by providing everyone a job
Is it possible to eliminate poverty by providing everyone a job?

  • Statistics say no!!

  • Most of the poor population work

    • Don’t work enough

    • Work part time or part year

  • New problem

    • Low wages


Where do wages come from
Where do wages come from? job?

  • Interaction of the Supply and Demand for Labor

  • Where does demand for labor come from?

    • Firms

  • What are the important variables?

    • Wages and number of workers

  • What relationship do these variables have?

    • Negative


What happens when wages increase
What happens when wages increase? job?

  • Higher costs for the firm

    • What happens to prices?

    • increase

    • What happens to output?

    • decrease

    • What happens to the number of workers needed?

    • decreases

  • Change from using labor to capital


What factors affect the demand for labor
What factors affect the demand for labor? job?

  • Demand for the product

    • Increase???

      • More output needed so more workers needed

  • Price of inputs

    • Increase???

      • Costs increases so less output produced and less workers needed

  • Available technology???

    • Increase???

      • More capital used so less workers needed


What determines the supply of labor
What determines the Supply of Labor? job?

  • Workers

  • What is the slope?

    • Positive or Zero depending on whether it is the market or firm

  • Market Labor Supply

    • Positive Slope

    • If wages of secretaries increase (ceteris paribus) more people want to be secretaries


  • Firm Labor Supply job?

    • Horizontal

    • If all firms were offering similar wages and everyone had enough workers….

      • How many workers will want to work at a lower wage?

        • NONE

      • What if firms want to offer a higher wage? How many workers will they get?

        • Infinitely many…but the firm already had enough

          • Higher wages will only increase the costs to the firm

      • Everyone offers the same wage…which is???

        • MARKET EQUILIBRIUM WAGE


Wage job?

Wage

Ls

Ls

Ld

Ld

# workers

# workers

Market

Firm


What about between occupations
What about between occupations?? job?

  • A decrease in the Ls of one occupation could increase the Ls in another occupation

  • Remember

    • A decrease in Ls is a shift to the left

    • An increase in Ls is a shift to the right


In class exercise 10

In-class exercise 10 job?

What happens as workers change occupations?


Equilibrium Wages Can Change Overtime!! job?

Ls’

Wage

Wage

Ls

Ls

Ls’

W2

W1

W1

W2

Ld

Ld

N2

N1

N1

N2

# workers

# workers

Sales

Computer


Since l d is downward sloping if wage gets too high will the firm stop hiring workers

Since L job?d is downward sloping, ifwage gets too high will the firm stop hiring workers?

NO…workers add to output and revenue


Marginal product of labor mp l
Marginal Product of Labor (MP job?L)

  • Additional output that can be produced by a firm when they hire one additional worker

  • What is the goal of the firm??

    • Maximize profits

    • Profits = Revenue – Costs


So… job?

  • Employ up to the point where the additional revenue (Marginal Revenue) just equals the additional cost (Marginal Cost) of that worker

  • If MR > MC what should the firm do

    • Hire another worker

  • If MC > MR what should the firm do

    • Don’t hire


Does does mp l look like either of these
Does does MP job?L look like either of these?

MP

MP

Number of Workers

Number of Workers


MP job?

Stop Hiring

MR=MC

MR>MC

Hire

Don’t Hire

MR<MC

Number of Workers


Marginal revenue product of labor mrp l
Marginal Revenue Product of Labor (MRP job?L)

  • Value of the additional output produced

  • MRPL = MPL * P


What about the cost side
What about the cost side? job?

  • What is the MC or additional cost per worker?

    • Wage

  • Want to hire until revenue made by the last worker = cost of the last worker

    • Hire until MR = MC

  • What is the MR??

    • MPL * P

  • Hire until MPL * P = wage


In class exercise 11

In-class exercise 11 job?

Hire or Not???


Why is the wage rate too low mp l p wage
Why is the wage rate too low?? job?MPL * P = wage

  • MPL is too low

    • MPL poor < MPL non-poor

    • Too little education

    • Not enough skills or experience

  • Price too low

    • Farmers during a good harvest because everyone is probably having a good harvest


Where does income come from
Where does income come from? job?

  • Wages

  • Capital/assets

  • Government transfers

  • If first two do not equal some “required minimum” then the third entered


Summary the poor have lower wages because
Summary: The poor have lower wages because… job?

  • Low Marginal Revenue Product of Labor

    • Low levels of training/education

    • Low price of the output

    • Work in markets with restricted demand

    • Work in markets with high labor supply

    • Work in non-unionized markets

  • Discrimination


What can we do
What can we do?? job?

  • Increase productivity

    • Subsidize education

    • Job placement

  • Guaranteed minimum income

  • Government intervention in the labor market

  • But…give people something for free and it decreases the incentive to get it on your own.


Chapter 11

Chapter 11 job?

Welfare Programs


Movie ending welfare as we know it

Movie: Ending Welfare as We Know It job?

Homework: Detail the changes that the Clinton Administration tried and the impacts of these changes on the families depicted


Chapter 111

Chapter 11 job?

Welfare Programs


What is the history of helping the poor
What is the history of helping the poor? job?

  • Great Depression brought high unemployment

    • Enacted income security programs as part of the New Deal

  • Late 1950s and Early 1960s Kennedy set fighting poverty as a major goal

    • Highlighted by the Civil Rights March in August 1963

  • 1964 Johnson declared poverty as part of his Great Society plan

    • Goal: reducing poverty, eliminate discrimination, and begin training programs



Income transfer payments
Income transfer payments stamp program for the poor

  • Money income transferred from the government to the poor

  • Two types:

    • Social insurance programs

      • Benefits given on a basis of previous service or contribution (social security or unemployment)

    • Means-tested program

      • Benefits given on the basis of need


Basic idea
Basic Idea stamp program for the poor

  • Give money to the poor and it will eliminate poverty

  • Monetary transfers are referred to as welfare or public assistance

  • In 1987 48 billion dollars would have been necessary to put everyone in poverty above the poverty standard


Problems
Problems stamp program for the poor

  • Exclusive reliance

    • People will never escape poverty if the government gives freely

    • Lead to perpetual poverty

  • No work incentive


Cash assistance programs
Cash Assistance Programs stamp program for the poor

  • Supplementary Security Insurance

    • For the elderly, blind or disabled

  • Temporary Aid To Needy Families (TNAF)

    • Provide families whose father is absent or disabled

    • 1961 Congress permitted but didn’t require aid to be extended to two parent families

    • 1968 Supreme eliminated the no man in the house requirement

    • Was called Aid to Families with Dependent Children (AFDC)

      • Changed July 1, 1997


  • General Assistance stamp program for the poor

    • Given by each state

    • Assistance for the needy


How much does each give
How much does each give?? stamp program for the poor


Is this amount adequate
Is this amount adequate??? stamp program for the poor

  • A mother with two children receives about $10,200 in benefits.

  • This is about ½ of the poverty standard

  • Is this fair?

    • SSI gives more than 2.6 times more than TANF

  • Other Problems

    • With TANF most male headed households don’t qualify

    • Deserving vs. non-deserving


Family disincentive issue
Family Disincentive Issue stamp program for the poor

  • Targeting female heads of households may create more female headed families

    • Females may leave home to create a separate household

    • May increase likelihood of separation or divorce

    • May increase likelihood of having more children

      • New programs designed to help reduce this problem

    • Fathers may leave to increase eligibility


Work disincentive issue
Work Disincentive Issue stamp program for the poor

  • Until 1967 there was no incentive to work

    • Every $1 earned in the labor market, welfare benefits decreased by $1

  • Marginal Tax Rate was 100%

  • What is the Marginal Tax Rate?

    • Tax on the last (additional) dollar earned

  • Program was changed in 1967 to try to fix the problem.

    • Marginal tax rate decreased to 67%


Before 1967
Before 1967 stamp program for the poor

  • A mother with 3 children could receive $400 per month ($4800 a year) and was able to find a part time job paying $5 per hour for 10 hours a week for 48 weeks. How much would her benefits decrease if she took the job?

  • How much does she earn at her job?

    • 5*10*48 = 2400

  • Original benefits – amount earned from job = new benefit amount

    • 4800 – 2400 = 2400

  • How much is she actual earning per hour from her job?

    • $0.00 per hour


Changes in 1967
Changes in 1967 stamp program for the poor

  • Marginal Tax Rate was decreased to 67%

  • Disregarded the first $1080 of income earned in the labor market

    • $720 per year for work release expenses

    • $360 per year for other general expenses


Did it make a difference
Did it make a difference? stamp program for the poor

  • Basic structure:


In class exercise

In-class exercise stamp program for the poor

Did it make a difference?

A mother with 3 children could receive $400 per month ($4800 a year) and was able to find a part time job paying $5 per hour for 10 hours a week for 48 weeks. How much would her benefits decrease if she took the job?


Solution
Solution stamp program for the poor

  • Earnings: 2400

  • New benefits: 4800 – (2400-1080)*.67 = 3915.60

  • Total Earnings: 2400 + 3915.60 = 6315.60

  • Additional Income: 6315.60 – 4800 = 1515.60

  • Dollar Per hour earned: 1515.60/480 = $3.15


Does this really give the incentive to work
Does this really give the incentive to work?? stamp program for the poor

  • Earn $3.15 per hour of $5 per hour job

  • Include in child care, transportation, and other necessities and you now earn under $2 per hour

  • But…income increased from $4800 to $6315.60

    • 30% increase in income


In class exercise 111

In-class exercise 11 stamp program for the poor

Is there an incentive to work??


Now graphically
Now Graphically stamp program for the poor

Total

Income

Gross Income

D

income

E

Basic support level

B

A

W

C

Benefits

Hours of work


What were those points
What were those points? stamp program for the poor

  • A: individual doesn’t work at all

  • B: hit income equal to 1080  benefits will begin to decrease

  • C: decrease in benefits due rising income

  • D: income increasing at a slower rate due to Marginal Tax Rate of 67%

  • E: income before 1967 when Marginal Tax Rate was 100%

  • W: increase in income as more hours are worked


Conflicting welfare goals
Conflicting Welfare Goals stamp program for the poor

  • Maybe we should decrease the Marginal Tax Rate to 33% or even zero.

    • What happens to the dollar per hour earned as we decrease the Marginal Tax Rate?

      • Increases

  • Redo in-class exercise 11 with a Marginal Tax Rate of 33%

    • Why don’t we do this??

      • What will pay for the program?


Welfare has three distinct goals
Welfare has three distinct goals stamp program for the poor

  • Provide income

  • Provide work incentives

  • Achieve cost minimization


Breakeven income
Breakeven income stamp program for the poor

  • Point at which the individual loses all cash benefits

  • From exercise 11 what would be the breakeven income level?

    • (7500/.67)+1080 = 12,274.03

  • If the marginal tax rate would decrease what would happen to the breakeven income?

    • increase


Where did this come from
Where did this come from? stamp program for the poor

  • What are the new benefits at the breakeven income level?

    • Zero

  • Old benefits – (income-1080)*.67 = 0

  • Solve for income

    • (old benefits/.67) = income - 1080

    • (old benefits/.67) + 1080 = income


Now adding in the in kind programs
Now adding in the in-kind programs stamp program for the poor

  • Food Stamps

    • Coupons which people use to purchase food

    • Average benefit in 1999 was $272 per month for a family of four

    • $9.07 per day for the family to eat three meals

    • $3.02 per meal for the family

    • $0.76 per meal per family member

    • Small amount per meal but increases the standard of living for the family


  • Medicaid stamp program for the poor

    • Medical insurance program for the poor

    • Annual benefit averages about $2,000 per family of four

  • Housing Assistance

    • Averages $2,000 per family per year

    • Subsidizes rent (based on income)

  • If a family of four were eligible for all three…

    • Gain $7,264 in addition to any cash transfers that they were eligible for


But… stamp program for the poor

  • Not all in-kind benefits increase a family’s standard of living

  • Not everyone is eligible for all three in-kind programs

  • Now…adding these to our graph


Total stamp program for the poor

Income

D*

E*

B*

Gross Income

A*

D

wage

E

Basic support level

B

A

C

W

Benefits

Hours of work


What were those points1
What were those points? stamp program for the poor

  • A*: start at higher level to reflect in-kind and cash transfers

  • B*: Cash benefits, food stamps, and housing assistance beings to decrease after disregarded income is earned

  • D*: lose all food stamps and housing assistance

  • E*: lose all benefits (cash and in-kind)


When do we lose benefits
When do we lose benefits? stamp program for the poor

  • Medicaid

    • Must earn < 133% of the poverty line

    • How much can you earn if the poverty line is $12,000?

      • $15,960

  • Cash transfers

    • Marginal Tax Rate is 67%

  • In-kind transfers

    • Marginal tax rate is 33%


New work incentive problem
New work incentive problem stamp program for the poor

  • Between B* and D*

    • Marginal tax rate of cash transfers??

      • 67%

    • Marginal tax rate of in-kind transfers??

      • 33%

    • If gain both, what is the marginal tax rate??

      • 100%

    • No incentive to work again


What has been tried
What has been tried? stamp program for the poor

  • Negative income tax

    • Guaranteed income

    • Simple program because give on basis of need

    • Monetary and non-monetary costs (time)


Impacts
Impacts stamp program for the poor

  • Family structure

    • No incentive to split up family, but incentive to form household early to become eligible for aid

    • + and – impacts

  • Work incentives

    • Labor force participation decreased

    • 5% by males, and 22% by females

    • Negative impact

  • When do you file??


Guaranteed jobs carter administration
Guaranteed Jobs stamp program for the poor(Carter administration)

  • Everyone willing and able to work will be found a job

  • Positive impacts

    • Decreases need for welfare, provides a work incentive, and promotes family stability

  • Negative impacts

    • Very expensive

    • Who is able to work?

    • People move in and out of poverty…who do you help first?


Workfare regan administration
Workfare stamp program for the poor(Regan administration)

  • Force the poor to work to keep their benefits

  • Point…give back to the community that is providing for you

    • Community service

  • What about non-participants??

    • Didn’t really make a difference


Edfare
Edfare stamp program for the poor

  • Force the poor to do “something” that will help them move off of welfare

    • Teach people hot to search for a job

    • States control

      • Too much difference between states

    • California

      • Start with a 3 week job search

      • If no job…enroll in training program

      • If still no job…perform community service


Family support act of 1988
Family Support Act of 1988 stamp program for the poor

  • 20% of states nonexempt TANF recipients must be in edfare programs by 1995

  • States required to put workfare programs in place

    • One parent must provide 16 hours of community service a month

  • Recipients can continue receiving Medicaid and subsidized housing for one year after leaving the poverty roles


What are the objectives of an income transfer program
What are the objectives of an income transfer program? stamp program for the poor

  • Adequacy

    • People who can and can’t work have access to adequate income levels

  • Target Efficiency

    • Target those who are most in need

  • Administrative Efficiency

    • Achieve goals at minimum cost


  • Horizontal Equity stamp program for the poor

    • People in similar circumstances should be treated equally

    • Problem: State run programs

  • Vertical Equity

    • Give before judge

    • Those with greater needs should receive more

  • Work Incentives

    • Should be in the interest of those to work to do so


  • Family Stability Incentive stamp program for the poor

    • Should promote initial family structure

  • Independence

    • Progress should be to move people off the program

  • Coherency

    • Should be understandable and able to be controlled


Anti poverty effects
Anti Poverty Effects stamp program for the poor

  • Goal: alleviate economic distress by those with no or low incomes

  • How find??

    • Compare pre- and post-transfer poverty rates

    • Estimate degree to which transfers decreased the poverty gap

  • Findings: people remain poor after transfers BUT poverty gap is decreased

  • Programs are effective!!


Chapter 5

Chapter 5 stamp program for the poor

Age and Health


Does not working poverty
Does not working = poverty? stamp program for the poor

  • NO!!!

    • ½ of those who are poor are retired or disabled

  • 3.5 million people over 65 are considered poor

  • 11% of the poor are not expected to work

  • What are they called?

    • Nonparticipants



70 of the poor elderly are women
70% of the poor elderly are women stamp program for the poor

  • Why??

    • Men of that generation worked

    • Men’s life expectancy is shorter

      • Women – 80.1

      • Men – 74.8

    • Women gain benefits from their husband’s job but they are cut


Poverty rate for elderly has been decreasing
Poverty rate for elderly has been decreasing stamp program for the poor

  • ½ of the rate in 1970

  • Still considered a serious problem

    • Less able to get a full time job

    • Why?

      • Firm’s don’t want to train

      • Less productive

      • Less flexible frame of mind

      • Won’t be able to work 40 hour weeks


Thus working is really not an option

Thus…working is really not an option stamp program for the poor


Life expectancy has been increasing

Year stamp program for the poor

Total

Male

Female

2004

77.6

74.8

80.1

2000

76.3

73.5

79.1

1995

75.7

72.4

79.0

1990

75.4

71.8

78.8

1985

74.7

71.1

78.2

1980

73.7

70.0

77.4

1975

72.6

68.8

76.6

1970

70.8

67.1

74.7

1960

69.7

66.6

73.1

1950

68.2

65.6

71.1

1940

62.9

60.8

65.2

Life expectancy has been increasing


What are the leading causes of death
What are the leading causes of death? stamp program for the poor


Sources of income
Sources of Income stamp program for the poor

  • 10% of the elderly participate in the labor force

  • 90% are voluntarily removed from the labor market

    • Some of the “voluntarily” is forced early retirement

    • If lose job it is harder to find a new job


Are there alternatives to working
Are there alternatives to working? stamp program for the poor

  • Savings

  • What would you guess the median net worth of an individual 60-65 would be??

    • 120,000

  • What composes most of this??

    • Ownership of homes


Remember
Remember… stamp program for the poor

  • This is a group of Nonparticipants

  • Important to look at why???

    • Makes the relationship of not working = poverty not as direct


Chapter 6

Chapter 6 stamp program for the poor

Family Size and Structure

“The Feminization of Poverty”


Female headed households have been increasing over the last 20 years
Female headed households have been increasing over the last 20 years

  • Why?

    • Increase in the number of single mothers

      • Out of wedlock births

      • Adoptions

    • Increase in the number of divorces

      • Divorce rate in the U.S. is 52%


Changing family structure
Changing Family Structure 20 years

  • Two parent families is not the norm anymore

  • Why?

    • Increase in Divorce/Separation

    • Out of Wedlock Births

    • Death of a Spouse

  • On average White FHH due to divorce

  • On average Black FHH due to out of wedlock births


Questions to address
Questions to address 20 years

  • Why has there been a rapid increase in FHH?

    • Not necessarily a conscious choice

  • Why do FHH have high poverty rates?


Causes of growth in fhh
Causes of Growth in FHH 20 years

  • Increased labor force participation by females

    • 1950 – 30%

    • 1990 – 57.7%

    • Working outside the home decreased the dependence on men’s wages

    • Women are less likely to stay in an unhappy marriage


Gary becker s theory of marriage
Gary Becker’s Theory of Marriage 20 years

  • Decision to marry is influenced by the expected gains of the union

  • Historically

    • Females worked at home

    • Males worked in the labor market

    • Why???


Comparative advantage
Comparative Advantage 20 years

  • When you can perform the act at a lower opportunity cost than the others involved

  • THE FOLLOWING SEVERAL SLIDES ARE NOT IN THE SLIDE PACKET…..


It is a matter of trade
It is a matter of trade 20 years

  • Do we trade things of equal value?

    • NO!!

    • Trade to gain more of what we value

  • Would you trade me a dollar for a dollar?

  • In order to make a trade you have to come out ahead

  • Trade should create wealth

    • Productivity


Productivity
Productivity?? 20 years

  • Trade doesn’t always produce something

  • Example

    • Jack has a basketball, and Jim has a baseball glove

    • Jack wants a glove, and Jim wants a basketball

    • Trade takes place

    • Wealth has been created

    • New arrangement makes each happier


What happened here
What happened here?? 20 years

  • Basketball and Baseball Glove are scarce resources

  • Each traded for a more valuable good

  • Each incurred a cost

    • Opportunity cost

    • Next best alternative foregone

    • What you gave up to do what you are doing

  • What is the opportunity cost of Jim’s trade?

    • Baseball glove

  • What is the opportunity cost of Jack’s trade?

    • basketball


When will trade happen
When will trade happen? 20 years

  • When the value of exchange is greater than ONE

  • So…trade when the benefits > costs


Example
Example 20 years

Gus and Harry’s garden and lawn look EXACTLY the

same upon completion

Harry offers to do ¾ of Gus’s garden if Gus mows Harry’s entire lawn

Should Gus agree to the trade??


YES!!! 20 years

  • For Gus

    • Mow his own lawn (40 minutes)

    • Mow Gus’s lawn (40 minutes)

    • Do ¼ of his garden (80*.25 = 20 minutes)

    • Total (100 minutes)  saved 20 minutes

  • For Harry

    • Own garden (120 minutes)

    • ¾ of Harry’s garden (120*.75 = 90 minutes)

    • Total (210 minutes)  saved 30 minutes

  • Both get everything done and have more leisure time


Law of comparative advantage
Law of comparative advantage 20 years

The principle that, given the freedom to respond to market forces, people will tend to export goods for which they have comparative advantage and import goods for which they have comparative disadvantage, and that they will experience gains from trade by doing so.


Producing and trading
Producing and trading 20 years

  • Two people: Elizabeth and Brian

  • Each produce two goods: Bread and Apples

  • Elizabeth  10 loaves of bread and 10 apples

  • Brian  5 loaves of bread and 15 apples


Comparative advantage1
Comparative Advantage 20 years

  • Should both produce apples and bread or should they specialize?

  • What does specialize mean?

    • Produce the good that you do best

    • Produce at a lower costs than other person(s) can

    • Called comparative advantage

    • Looks at opportunity cost

      • What was that?

      • What you have to give up

      • Give up less?? Have the comparative advantage


What are the opportunity costs
What are the opportunity costs? 20 years

  • Elizabeth

    • If only produce bread how many apples does she give up?

      • 10 apples

    • If only produces apples how much bread does she give up?

      • 10 loaves of bread

  • Opportunity Costs

    • 10 Bread = 10 Apples

    • 1 Bread = 1 Apple


What are the opportunity costs1
What are the opportunity costs? 20 years

  • Brian

    • If only produce bread how many apples does she give up?

      • 15 apples

    • If only produces apples how much bread does she give up?

      • 5 loaves of bread

  • Opportunity Costs

    • 5 Bread = 15 Apples

    • 1 Bread = 3 Apples

    • 1/3 Bread = 1 Apple


Should we specialize
Should we specialize? 20 years

  • Elizabeth

    • 1 Bread = 1 Apple

  • Brian

    • 1 Bread = 3 Apples

    • 1/3 Bread = 1 Apple

  • Who produces apples cheaper?

    • What does cheaper mean?

      • Lower opportunity cost (give up less)

    • Brian!!! Give up only 1/3 loaves of bread

  • Who produces bread cheaper?

    • Elizabeth!!! Give up only 1 apple


Here is the deal
Here is the deal 20 years

  • Elizabeth produces only bread (20 loaves)

  • Brian produces only apples (30 apples)

  • Trade 8 loaves of bread for 12 apples

  • Breakdown of end result

    • Elizabeth Bread?

      • 12 loaves (20 - 8 traded)

    • Elizabeth Apples?

      • 12 apples (0 + 12 traded)


  • Brian Bread 20 years

    • 8 loaves (0 + 8 traded)

  • Brian Apples

    • 18 apples (30 -12 traded)

  • Are they better off??







Can you do it
Can you do it?? 20 years

1. Draw the production possibility curves for both countries. (Clothing on y-axis)

2. Which country has the comparative advantage in clothing? Food?

3. The United States and United Kingdom are negotiating a trade of food

and clothing between the countries. If the terms of trade is 25 units of

clothing for 15 units of food, should both counties agree?


Homework 4

Homework 4 20 years

Comparative Advantage


Homework
Homework 20 years

  • Two countries produce two products – digital cameras and vacuum cleaners. With the same factor resources evenly allocated by each country to the production of both goods.

  • Who has the comparative advantage in each?

  • If the trade is 420 vacuum cleaners for 840 digital cameras, do the countries agree to the trade?


Back to becker s theory of marriage
Back to Becker’s Theory of Marriage 20 years

  • Men had a comparative advantage in the labor market

  • Why??

    • More human capital, skill, and experience

    • Higher wages

    • Opportunity cost of not working is higher

  • Women had a comparative advantage in home production

  • Why?

    • Wages in the labor market would be lower

    • Less experience, less human capital

    • Less costly for them to stay out of the labor market

    • Opportunity cost is lower

  • Because of comparative advantage marriages stayed together


Why are marriages breaking up now
Why are marriages breaking up now? 20 years

  • Increase in labor force participation of females caused

    • Increases in human capital, skill level, and experience

    • What happened to the wage?

      • Increased

    • What happened to the opportunity cost of not working?

      • Increased

    • Women not receiving as much benefit from the union as in the past


Female lfp also has increased divorces
Female LFP also has increased divorces… 20 years

  • Working wife may lead the man to feel inadequate as a provider

  • Alters the power of the relationship

  • Conflict of home duty allocation


Declining wages and increased unemployment of men
Declining Wages and increased unemployment of men 20 years

  • Median earnings for a full time male worker has declines since 1973

  • Why???

    • Labor pool has increased

Ls

Wage

Ls’

W1

W2

Ld

# workers

1

2


Welfare benefits
Welfare Benefits 20 years

  • Some blame for contributing to marital instability and out-of-wedlock births

  • Transfer payment reduce the cost of bearing another child

  • Problem

    • People are poor because they have no money

    • Tensions due to money are #1 reason for divorce

    • Is it the benefits that you can gain or the fighting because you have no money that causes divorce?

  • Issue has not been resolved


The supply of marriageable men
The Supply of Marriageable Men 20 years

  • William Darity Jr. and Samuel L. Myers wrote “Changes in the Black Family Structure”

  • FHH among African American Families is due to the unfavorable marriage market

  • Why?

    • Unemployed

    • Jailed

    • Drug addicts

    • killed



Changes in social norms attitudes
Changes in Social Norms & Attitudes from

  • Out-of-wedlock birth stigma has disappeared

  • Past

    • Get pregnant…total embarrassment

  • Now

    • Get pregnant…join a support group

    • Single parent is now an acceptable alternative to duel parent households


Why do fhh experience poverty more
Why do FHH experience poverty more?? from

  • Low earnings capacity

    • Women earn less than men (wage gap is about 40%)

    • Less OJT, HC, less experience

    • Enter labor force later in life (less seniority)

    • More part time workers

  • Inadequate or non-existent child support

    • 61.5% of families eligible for child support receive it

    • Most receive ½ of the awarded amount


  • Low welfare benefits from

    • Poverty rates would be lower if transfers were bigger

    • Widows receive two times the amount of FHH

    • Deserving versus non-deserving


Consequences of poverty in fhh
Consequences of Poverty in FHH from

  • Children can grow up with

    • Limited resources

    • Poor nutrition levels

    • Inadequate medical services

    • Low investments in human capital

  • Intergenerational transmission of poverty


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