Male Participation Rates, by Age

0

20

40

60

80

100

120

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Par

tici

pati

on R

ate

(%)

20-24 25-54 55-64 65 and over

• Rising real wages and earnings– Real earnings have risen since 1940 and since the income effect

dominates the substitution effect for older males, the participation rate has fallen.

• Social Security and private pensions– Social Security benefits and coverage has increased over time.

• This non-labor income has encouraged exit from the labor force.– Private pension coverage has expanded which is another source

of non-labor income. • Pension rules have been changed to encourage early retirement.

• Disability benefits– The Social Security disability program has become more generous

which encourages low wage workers to exit the labor force.• Life-cycle considerations

– Earnings of workers past their mid 50’s tend to grow slowly or decline.

• Their education and training become more obsolete as well as declines in physical and mental capabilities.

• This lower wage growth encourages workers to substitute retirement for work.

Why LFP Rate of Older Males Declined

Female Participation Rates, by Age

0

10

20

30

40

50

60

70

80

90

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Par

tici

pati

on R

ate

(%)

20-24 25-54 55-64 65 and over

Most of the rise in participation rate is due to a rise in participation among married women.

This is a surprising result since the rise in real wages of married men would have tended to decrease participation rates of married women

• Rising real wage rates for women – The rise in real wages for women has both a Becker income and

substitution effect.• Substitute towards goods in terms of both consumption and production of

commodities. • Small income effect since its effect depends on the number of hours

already working.– It is 0 if not currently working.

• Changing preferences and attitudes– Career objectives of women have changed over time towards

more market work.• Changed indifference curves to make them flatter.

• Rising productivity in the household– Technology improvements have reduced the time necessary for

household production and freed time for market work.• Microwaves, vacuum cleaners.

Why the Participation Rate of Females has Risen

• Declining birthrates– Presence of pre-school is associated with lower participation rates

and the one-half decline in the birth rate and has freed time for market work.

• High wages tend to lower the birth rate since it raises the opportunity cost of children.

• The impact of children on participation has declined over time.• Rising divorce rates

– The rise in the divorce rate has increased the incentive for women to participate in order to protect themselves against the impact of a potential divorce.

• Expanding job accessibility– There has been expansion in employment in jobs traditionally

held by women.– The availability of part-time jobs has increased making it easier for

women to work.

Why the Participation Rate of Females has Risen

• Attempts to maintain living standards– In the last 20 years, the earnings of males has been

stagnant and falling in some cases.– Married women may have increased their participation

to maintain the family’s living standard.

• Relative importance– Likely the most important explanations are the rise in

the real wage rate and the expansion of “women’s jobs.”• The timing is off for the attitudes and anti-discrimination laws.• The technology innovations and lower birth rates may the

result rather than the cause of the higher participation rates.

Why the Participation Rate of Females has Risen

Female Participation Rates, by Race

0

10

20

30

40

50

60

70

1972 1977 1982 1987 1992 1997 2002

Par

tici

pati

on R

ate

(%)

White African-American

Male Participation Rates, by Race

60

65

70

75

80

85

1972 1977 1982 1987 1992 1997 2002

Par

tici

pati

on R

ate

(%)

White African-American

• Demand-side factors– African-American males face worse labor market

conditions due to lower education, discrimination, and mismatch between location of jobs and residence.

• Supply Side – Non-market income sources such as Social Security and

public assistance are more appealing to African-American males since have lower wages.

– Illegal activities may be also more attractive. • The health of older African-American males tends to

be worse than for older white males.• High participation rate of African-American wives may

lower the participation rate of African-American husbands.

Lower Participation Rate for African-American Males

• The business cycle has two offsetting impacts on participation. – The added-worker effect occurs when the primary earner loses his

or her job and other family members look for a job to offset the decline in family income.

• This because the other family members suffer a decrease in their non-labor income.

– The discouraged -worker effect occurs when a person stops looking for work because they become very pessimistic about finding a job.

• Recessions lower wages and thus the “price” of leisure and so some workers substitute leisure for job search.

• The discouraged worker effect outweighs the added worker effect and so the labor force shrinks in recessions.– The added worker effect applies only to families where the

primary earner is unemployed, while the discouraged worker effect may impact all workers.

– Some married women are only marginally attached to the labor force.

Cyclical Changes in Participation

0

10

20

30

40

50

60

1915 1935 1955 1975 1995

Wee

kly

Hou

rs o

f W

ork

Hours

Why Have Hours of Work Remained Stable since 1945

• Rise in real wages since 1945 should have decreased weekly work hours due to the income effect.

• A leading explanation is the rise in education levels has offset the impact the rise in real wages.– More education may reflect more job commitment– Educated worker have nicer working conditions and thus less desire to

reduce hours.– Educated workers have more fixed costs per worker (e.g. training) and

thus firms resist reductions in hours per week (costs per hour rise).• Other factors include higher tax rates, and overtime pay premiums • Americans face a “time squeeze” since total hours worked per

person has risen.– Partly due to rise in share of prime-age workers who work more hours.– Much of the rise has been voluntary since highest paid jobs have had

biggest rise.– Hours of leisure have risen not fallen.

• Household production time has fallen.

Are Americans Overworked?

Household production and Technology

• Technology made women more productive in HH,• but also makes long hours on household production

unnecessary• in total

– first hours of H highly valued– additional hours much less valued

• 20th century time savers:– dishwasher– vacuum– microwave– refrigerator

• shift some hours spent on housework to either– leisure– work

Unemployment Rate

0%

5%

10%

15%

20%

25%

1972 1977 1982 1987 1992 1997 2002

Fem

ale-

Mal

e E

arni

ngs

Rat

io

White Male White FemaleAfrican-American Male African-American Female

• Households produce utility-yielding commodities with combinations of market goods and time.• Examples of commodities: meal, clean house,

entertainment, quality of children • Three uses of time

– Labor market time (generates income to buy market goods)– Household production time– Leisure time

• Uses of time are competitive with each other– Work takes away time from household production and

leisure• Tradeoff

– more hours worked, more $ to buy stuff– but less time for leisure and household production

Model of the allocation of time

Allocation of time• Marginal decision-making

– Should I work hours by 1 (and therefore leisure by 1)? – Answer: I will work by 1 hour as long as the market values my

time more than I do.• Market time valuation: wage

– Individual has no influence on market wage • Leisure time valuation: How I am willing to trade off

work/leisure• Factors that affect decision

– own preferences for work vs leisure, market wage, and nonlabor income.

• Model assumes individual will maximize utility subject to budget constraints (limits on time, money to spend, etc.).

• Time-intensive commodities use a large amount of time and a small amount of goods.– Watching the sunset.

• Goods-intensive commodities use a small amount of time and a large amount of goods.– Meal at fast-food restaurant.

• As labor-market time becomes more valuable—substitute time-intensive commodities for goods-intensive ones.

Commodity Characteristics

Indifference Curve

Leisure Hr

Inco

me/

day

240

Indifference curve shows work and leisure combinations that yield the same amount of total utility.

24 0Work Hr

U

Negative slope To keep the level of utility

the same, some of income must be given up if one wants more leisure

Convex to originWith low hours of leisure,

individuals are willing to give up large amount of income to get 1 more leisure hour.

With high hours of leisure, individuals are willing to give up small amount of income to get 1 more leisure hour.

Budget Constraint

Leisure

Inco

me/

day

240

Budget constraint shows the combinations of income and leisure that a worker could get given a wage rate

$120At a wage rate of $5, a worker could get a maximum income of $120 per day ($5/hour * 24 )

At a wage rate of $10, a worker could get a maximum income of $240 per day.

At a wage rate of $15, worker could get a maximum income of $360 per day.

$240

$360 Slope of budget constraint (rise/run) = wage rate

Utility Maximization

Leisure

Inco

me/

day

240

The optimal or utility maximizing point is where the budget constraint is tangent to the highest attainable indifference curve

$240

U1

U2

U3

16

$80A

At a wage rate of $10/hour, the optimal hours of leisure is 16 (8 hours of work) at point A

$360

Utility Maximization

Leisure

Inco

me/

day

240

The optimal or utility maximizing point is where the budget constraint is tangent to the highest attainable indifference curve

$240

U2

U3

16

$80A

If the wage rate rises to $15/hour, the optimal hours of leisure is 15 at point B

B

At a wage rate of $10/hour, the optimal hours of leisure is 16 (8 hours of work) at point A

15

$360

• Assume Mark has maximized utility subject to his budget constraint so that he is working for pay 40 hours per week with wage = $10/hour.

• What if wage increases to $15/hr ?

• Income effect of higher wage– higher wage increases income (he is richer)

• Demand for leisure increases, hours of work fall

• Substitution effect of higher wage– higher wage increases opportunity cost of leisure– hours of work increase

• Substitute goods for time in production of commodities – buy more restaurant meals and fewer home-cooked meals.– fly to vacation rather than drive.

Income and Substitution Effects

Effect of Change in Wage on Employment

• For women:– Dominant substitution effect, at least at lower wages.– perhaps income effect has become more dominant in

recent years.

• If only working few hours per week: – wage could cause person to leave labor force.

• If start out of LF and then wage increases: – Causes only substitution effect so will increase

probability of working for pay.

Change in Nonlabor Income• Assume:

– Mark has maximized utility subject to his budget constraint so that he is working for pay 40 hours /week with wage = $10/hour.

• Now there is an nonlabor income (he won a lottery):– demand for all normal goods including leisure

• paid work hours.• probability of working for pay (because it means a higher market

wage is required to induce Mark to work for pay).

– Effect is opposite if nonlabor income falls.

Taxes and Labor Supply• Progressive tax system based on taxing families

instead of individuals means that the earnings of a sequentially secondary earner are taxed at a higher marginal rate.

• Higher marginal tax rate means that household production has lower opportunity cost.

• Lower wage should mean less leisure, if leisure is a normal good.

• Therefore, theoretically, the overall impact on labor supply is ambiguous.

• Empirical research suggests that reductions in tax rates do increase both the hours worked and labor force participation

Income Tax and Individual Labor Supply

Leisure

Income/day

240

• An income tax shifts the after-tax wage downward and may either raise or lower a person’s optimal number of hours of work.

$240

I1

I2

16

U2

• Prior to the income tax, the optimal hours of work is 9 (15 hours of leisure) at point U1.

15

U1

$360

• The optimal hours of work would increase if the income effect was larger than the substitution effect.

• After the income tax, the optimal hours of work

decreases to 8 (16 hours of leisure) at point U2. This implies the substitution effect caused by the tax is larger than the income effect.

Leisure Cost of Goods• Leisure cost of an $8 movie ticket: how many

hours you have to work in order to pay for it • If wage=$6/hr, work 1 hr 20 min to pay for

ticket • If wage=$16/hr, ticket costs 30 min of leisure

• 1908 Ford Model T cost 2 years of average wages.

• 1997 Taurus cost 8 months of wages• Gallon of gas in 1970: 6.6 min, in 1997 5.4 min• Half-gallon of milk in 1919: 39 min, in 2000:

under 7 min• in 1900 a pair of Levis was 9 hours and 42 min, • 2000: 3 hours and 24 min• In 1910 a 3-min coast-to-coast phone call: 90

hrs 40 min, today, many people treat such phone calls as free.