Chapter 3 Labor Force Participation
Download
Report
Transcript Chapter 3 Labor Force Participation
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.
Figure 3.1
• Shows LFP trend from 1950 to
1998 for entire population, then
broken down by sex.
• Overall:
• Men:
• Women:
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.
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
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).
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.
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.
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.
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.
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:
Empirical Evidence
• What do empirical studies tell
us about whether spouses’ time
are substitutes or complements
(I.e., what is sign of the crosseffects): Key is presence of
children in the household.
– No kids:
– Yes young kids:
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:
• *
• *
• *
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.
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.
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: Ageparticipation profiles:
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.
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)
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.
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:
Decline LFP of PrimeAged 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.
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
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.
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.
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?
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
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
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?
–*
–*
–*
Continue
• High divorce rates tend to
education as means to economic
independence.
• Also: es in Field of Study:
• *
• *
• *
Reason #4: Living
Standards
• Theory: female LFP so that
family can maintain a good
standard of living, even though:
– Male wage growth for collegeeducated workers declined in 70s
and 80s;
– For unskilled workers, real wages
actually fell.
Reason #5: Increased
Job Opportunities
• In past 50 years, “female”
jobs have experienced aboveaverage 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
More on Reasons
• Also:some females moving
into previously maledominated occupations.
• *
• *
• Reason #6: Changing social
attitudes:
– If wife works, no longer conclude
that husband is a failure.
– More acceptance of child care.
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.
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.
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
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.
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.