The Allocation of Time between the Household

& the Labor Market

Age-EligiblePopulation

Employed Unemployed

Not in the Labor Force

Labor Force

Labor Force Definitions

LFP rate

unempl rate

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.

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.

Unemployment Rate

# of unemployed people = ------------------------------------ # of people in the labor force

# of unemployed = ------------------------------------------ # of employed + # of unemployed

ExampleSuppose 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 %

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.

The percentage of the age-eligible population that is in the labor force (either employed or unemployed).

Labor Force Participation Rate

The LFP Rate of men has declined.

The LFP Rate of women has increased a lot.

Trends in Labor Force Participation Rates 1947-2011

LFP Rates for Men by Age

Men’s LFP rates have been falling, especially for younger and older men.

LFP Rates for Women by Age

Women’s LFP rates have been rising especially for women aged 25-54.

Black men tend to have lower LFP rates than White men.Hispanic men (who can be of any race) tend to have higher labor force participation rates than White and Black men.Recently, Asian men have had higher LFP rates than White men.

Let’s next consider the LFP rates by race/ethnicity, first for men.

Black women tend to have higher labor force participation rates than White women.Asian women and Hispanic women (who can be of any race) tend to have lower labor force participation rates than White and Black women.

Next look at the LFP rates by race/ethnicity, for women.

Now consider the LFP rates by education, first for men.

We see that the LFP rates in 2011are higher for those with more education.

Now look at the LFP rates by education for women (again ages 25-64).

The LFP rates in 2011 are higher for those with more education, and the difference is more dramatic than for men.

Types of Unemployment

Frictional Structural Cyclical

Frictional Unemployment

Occurs when new entrants and reentrants enter the labor force, and when workers are between jobs, either having just quit or lost their last jobs.

Occurs even when there are enough appropriate jobs available, because it takes time to find a job.

Structural Unemployment

Occurs when those looking for work do not have the right skills or are not in the right location to fill the vacancies that exist.

Is more persistent than frictional unemployment because these difficulties are not easily or quickly remedied.

Cyclical Unemployment

Is associated with an overall deficiency in demand.

Occurs when there is an excess of workers relative to the number of unfilled positions.

Frictional and structural unemployment exist to some extent, even when there is no deficiency in demand.

The natural rate of unemployment or full employment unemployment rate is the acceptable rate of unemployment that exists in a healthy, active economy.

The natural rate of unemployment had been believed to be around 5 or 6 percent but may be lower than that.

This graph shows unemployment rates in 2007, just prior to the recession, when the overall unemployment rate was low, and in 2011, when unemployment rates remained quite high after the recession. Unemployment rates are higher among Blacks than among Whites. Unemployment rates are higher among teenagers than among those over 20.

Discouraged workers

These are workers who would like a job, but have not looked for work in the prior four weeks because they believe they would not find employment.As of 1994, to be classified as a discouraged worker, an individual must be available for work and have looked for work in the past year.

Underemployment

Occurs when workers have to

take jobs for which they are clearly over-qualified, or

work fewer hours than they would like.

Definition of full-time versus part-time employment

full-time: at least 35 hours per week

part-time: less than 35 hours per week

When an individual works part-time because he/she is unable to find full-time employment.

Part-time for Economic Reasons or Involuntary Part-time

Gender Differences in Unemployment and

Involuntary Part-Time Employment

In the past, women have been less attached to the labor force and had higher turnover rates than men. Women were more likely to be new entrants or reentrants to the labor force. They were, therefore, more likely to be frictionally unemployed as they searched for jobs.

On the other hand, unemployed women are more likely to drop out of the labor force than men, especially during recessions. (So the unemployment rate of women rises less than that of men during recessions.) They are then counted as “out of the labor force” instead of unemployed.

Women are more likely to be employed in the service sector, which has a higher unemployment rate than some sectors.Men, however, are more likely to be employed in blue-collar jobs and in durable manufacturing, where there are more layoffs and also high unemployment rates. There is greater cyclical variation in employment in blue-collar jobs and in durable manufacturing, with employment increasing more in economic upswings and declining more in downturns.On balance, the occupational distribution appears to lower the female unemployment rate relative to the male rate.

Prior to 1980, the net effect of these opposing forces was that women’s unemployment rates were higher than men’s.Beginning in the 1980s, women’s unemploy-ment rates have been about the same as men’s and, during recessions, even lower.

There has been an increase in women’s labor force attachment, which has reduced their turnover rate relative to men’s.

The disproportionately female service sector has expanded relative to the disproportionately male manufacturing sector.

Some Possible Reasons for this Change

Regarding part-time for economic reasons, a larger proportion of women than men are involuntary part-time workers.

The reasons here are not clear and may be either supply or demand based.

Employment Outcomes of Workers Displaced from their Jobs

Older workers who lose their jobs are less likely to find re-employment and more likely to be unemployed or to drop out of the labor force.

This is probably because of the difficulty of retooling, the decision to take early retirement, or age discrimination.

Women workers who lose their jobs tend to be more likely than men to drop out of the labor force.

This may be because traditional gender roles make it easier for women to fall back on the homemaker role, as well as because difficulties women face in the labor market lower the probability of re-employment and the rewards to extended search.

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.

Determinants of Demand for nonmarket time

Opportunity cost (usually the market price)

Level of wealth

Preferences

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

Budget Constraint: C = wh + V

nonmarket time/day

Income or Mkt Goods

Slope = - w or -wage rate

70

190

16

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.

0

Budget Constraint: C = wh + V

nonmarket time/day

Income or Mkt Goods

Slope = - w or -wage rate

70

190

16

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.

0

Budget Constraint: C = wh + V

nonmarket time/day

Income or Mkt Goods

Slope = - w or -wage rate

70

190

16

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.

0

Family of Indifference Curves

nonmarket time

I1

I2

I3

Income or Mkt Goods

Where along the budget constraint will she choose to operate? That depends on her preferences or her indifference curves.

Determinants of the Slope of the Indifference Curve

Ability to substitute

Tastes and preferences

nonmarket time

Income or Mkt Goods

G1

G0

IA

IB

LB LA L0

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).

Substituting goods for time

IB (flatter ICs)

nonmarket time

130

16

IA (steeper ICs)

8

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

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.

Tastes and PreferencesPeople with higher tradeoffs of market goods for nonmarket time have higher reservation wages and steeper indifference curves than people with lower tradeoffs.

IB (flatter ICs)

nonmarket time

130

16

IA (steeper ICs)

8

Income or Mkt Goods

Impact of nonlabor income on labor force participation

90

nonmarket time168 11

A

70

Income or Mkt Goods

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.

Change in the Wage Rate

nonmarket time

Income or Mkt Goods

An increase in the wage rate increases the steepness of the budget constraint.

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

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.

Graph of Income & Substitution Effects

Income Effect is movement from A to B.

Substitution Effect is movement from B to C.

nonmarket time

A

B

C

Income or Mkt Goods

Income Effect < Substitution Effect

nonmarket time

A

B

C

LC LA LB

Income or Mkt Goods

Nonmarket time has decreased & market time has increased.

Income Effect > Substitution Effect

nonmarket time

A

B

C

LA LC LB

Income or Mkt Goods

Nonmarket time has increased & market time has decreased.

The Impact of Economic Conditions on Labor Force Participation

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 effectDuring a recession, labor market opportunities are few. So the perceived market wage declines, causing a decline in 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.

Applications of the Theory

Effects on Labor Supply of

Taxes

Child care tax credits

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.

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.

nonmarket time

A

B

Income or Mkt Goods

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.

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.

nonmarket time

B

A

Income or Mkt Goods

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.

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

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.

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.

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.

Historical Patterns in Women’s LFP1990s: 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.

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

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

Historical Patterns in Men’s LFPThe participation of young men has declined, mainly due to a tendency to stay in school longer.Older men’s participation also declined. The provision of Social Security and the growing coverage of private pension plans transferred income from earlier to later years, creating an income effect that encouraged older men to retire.The participation of prime-age men also declined, but less so than for younger and older men. A participation drop was particularly dramatic for less-skilled men. This may be due to depressed relative wages brought on by declining relative demand for less-skilled workers.

Changes in Marriage, Divorce, Fertility & the Family

The marriage rate (per 1,000 people) has been dropping since 1980.On the other hand, the cohabitation rate (unmarried opposite-sex couples per 1,000 married couples) has been continually rising over the past 50 years.The divorce rate rose prior to 1980 and has been dropping since then.

The percent of married couples who are dual-earner couples rose prior to 2000 and then dropped a bit after that.

The median age at first marriage has been rising for both men and women over the past few decades.The percent never married has been generally rising.

The percentage married has been falling overall, as well as for white non-Hispanics, Blacks, and Hispanics.

The relation between women’s labor force participation &

marriage rates

As women have acquired more job-oriented education & training, their market productivity has increased relative to their home productivity.

This leads to smaller gains from specialization & exchange than in the days when women prepared for the traditional role of homemaker in a family with only a male breadwinner.

From this perspective,we would expect to see rising female labor force participation & lower marriage rates.

There are also some factors that could lead to increasing marriage rates.

Since women are no longer pressured to choose between marriage and family or a career, the costs of marriage are reduced.

In addition, men may prefer women who can make a larger contribution to family income.

These two factors would indicate a positive effect of women’s labor force participation on marriage rates.

While there are both positive & negative effects of women’s labor force participation on marriage, the negative effect appears to be larger.

A shortage of “marriageable” men is another explanation for declining marriage rates.

Insufficient supply may be the result of men’s declining real wages, and lack of stability in employment.

The labor market status of less educated men in particular has been declining in recent years.

Liberalization of attitudes toward divorce & cohabitation has probably also contributed to the growing number of unmarried young people.

Women’s rising economic opportunities increase their independence which may contribute to rising divorce rates.

Cohabitation: Opposite-Sex

Unmarried Couples

In some cases, opposite-sex cohabitation serves as a precursor to marriage.

In other cases, it serves as an alternative to marriage as well as an alternative to being single.

Children born to an unmarried mother are often living with two cohabitating parents.

When a person is lacking in financial resources, cohabitation can provide an alternative to being single.

Cohabitation: Gay & Lesbian Couples

Like traditional marriage & opposite-sex cohabitation, same-sex relationships offer partners not only companionship and affection, but economic benefits, including the ability to share economic resources & realize economies of scale.

Children of Gays & Lesbians

It has been estimated that 5% of gay couples & nearly 22% of lesbian couples have children.

Other estimates, which include currently unpartnered gay men & currently unpartnered lesbians indicated that as many as 14% of gay men & 28% of lesbians have children, many of them from a prior marriage.

These figures indicate that families are much more diverse than traditionally.

Fertility

The economic opportunities of women & men are likely to have an important influence on the fertility decision (number of children to have).

Women’s growing potential for market earnings increases the opportunity cost of children & would accordingly be expected to have a negative substitution effect on fertility.

Simultaneously, greater earnings would also have a positive income effect on fertility.

The negative substitution effect is expected to dominate for women.

On the other hand, the income effect is likely to dominate when men’s wages rise, as long as they do not generally give up much of their time for child care.

Thus, fertility is expected to be negatively associated with women’s wages and positively associated with men’s wages.

Other factors having a negative impact on fertility are the growing demand for “higher-quality” children (with better health & more education), & new & more effective methods of birth control.

Total Fertility Rate (TFR)The TFR is the number of births that a cohort

of 1,000 women would have if they experienced the age specific birth-rates in the current year throughout their childbearing years.

Dividing by 1,000 provides a measure of births per woman.

The following table and graph show how the total fertility rate has varied over the last 70 years.

Total Fertility Rates

Years TFR

1940-1944 2,523

1945-1949 2,985

1950-1954 3,337

1955-1959 3,690

1960-1964 3,449

1965-1969 2,622

1970-1974 2,094

1975-1979 1,774

1980-1984 1,819

1985-1989 1,899

1990-1994 2,042

1995-1999 1,986

2000-2004 2,041

2005 2,057

2011 1,895

The total fertility rate rose during the “baby boom” that followed WWII.

In the 1960s, the TFR started to drop bottoming out in the “baby bust” of the late 1970s.

Recently it has fluctuated around 1.9-2.0 births per woman.

Some other birthrate patterns and trends over the last few decades

The overall number of births per woman of age 15-44 has declined.The teen birthrate has also declined.However, the numbers of births per woman aged 35-39 and per woman aged 40-44 have increased.

Birthrates of unmarried women The birthrate of all unmarried women aged 15-44 has increased, as has the birthrate of the unmarried non-Hispanic white women of that age.However, for black unmarried women age 15-44, the birthrate has declined since 1990.The unmarried teen birthrate increased from 1970 to 1990 and then decreased between 1990 and 2010.The birthrate of unmarried women age 35-39 and 40-44 has increased since 1980.