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??
– Employed or actively seeking work
– May not be collecting a wage
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 subemployed??
• 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
• 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
• 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’
2
5
AD
GDP (in trillions)
Unemployment because need 3 trillion less units of the good
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
• 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
Pick out as many costs of
unemployment as you can…the
person with the most will get extra
credit!!!
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
Poor: Average Income = $7,642
19%
Earnings
Cash Welfare
56%
25%
Other Sources
Non-Poor: Average Income = $35,038
16%
2%
Earnings
Cash Welfare
Other Sources
82%
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
½ of those who experience
unemployment stay unemployed
for greater than 5 weeks
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?
• 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
• 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
Price
AS
Quantity
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 Curve
Inflation
Expected
Rate of
Inflation
Natural Rate
Unemployment
Of Unemployment
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
• Represents equilibrium
• Vertical at the natural rate of
unemployment
Inflation
Natural Rate
Unemployment
In-class exercise 9
The Phillips Curve
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
Q2 Q1
Quantity
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
Conservatives (Republicans)
Fight Inflation
Big decrease in inflation with only
Small increases in unemployment
Unemployment
Liberals (Democrats)
Don’t Fight Inflation
Small decrease in inflation but
Big increases in unemployment
Chapter 4
The Working Poor
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?
• 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?
• 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?
• 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?
• 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
– 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
Wage
Ls
Ls
Market
Ld
Ld
# workers
# workers
Firm
What about between
occupations??
• 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
What happens as workers change
occupations?
Equilibrium Wages Can Change Overtime!!
Ls’
Wage
Wage
Ls
W2
W1
Ls
Ls’
W1
W2
Ld
N2 N1
Sales
# workers
Ld
N1 N2 # workers
Computer
Since Ld is downward sloping,
if wage gets too high will the
firm stop hiring workers?
NO…workers add to output and
revenue
Marginal Product of Labor (MPL)
• 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…
• 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 MPL look like either of
these?
MP
MP
Number of Workers
Number of Workers
MP
MR=MC
MR>MC
Hire
Stop Hiring
Don’t Hire
MR<MC
Number of Workers
Marginal Revenue Product of
Labor (MRPL)
• Value of the additional output produced
• MRPL = MPL * P
What about the cost side?
• 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
Hire or Not???
Why is the wage rate too low??
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?
•
•
•
•
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…
• 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??
• 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
Welfare Programs
Movie: Ending Welfare as We
Know It
Homework: Detail the changes that the
Clinton Administration tried and the
impacts of these changes on the families
depicted
Chapter 11
Welfare Programs
What is the history of helping
the poor?
• 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
• Late 1960s – Early 1970s Nixon supported
a cash and food stamp program for the poor
• Republicans pushed harder for the cash
transfers
Income transfer payments
• 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
• 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
• Exclusive reliance
– People will never escape poverty if the
government gives freely
– Lead to perpetual poverty
• No work incentive
Cash Assistance Programs
• 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
– Given by each state
– Assistance for the needy
How much does each give??
Program
Number of
recipients
Average monthly
payment
SSI
5.3 million
364
TANF
14.1 million
137
GA
1.2 million
150
Is this amount adequate???
• 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
• 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
• 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
• 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
• 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?
• Basic structure:
1.) original benefits  (income  1080) * .67  new benefits
2.) New Benefits  Income  Total income
3.) Total income  original benefits  change in income from working
4.) Addition to income / Hours worked  Actual Dollar Earned per hour
In-class exercise
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
• 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??
• 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 11
Is there an incentive to work??
Now Graphically
Total
Income
D
A
B
W
E
Basic support level
C
Hours of work
What were those points?
• 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
• 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
• Provide income
• Provide work incentives
• Achieve cost minimization
Breakeven income
income floor
breakeven income 
 disregarde d income
Tax Rate
• 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?
• 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
• 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
– 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…
• 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
Income
D*
B*
A*
A
E*
D
B
E
C
W
Basic support level
Hours of work
What were those points?
• 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?
• 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
• 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?
• Negative income tax
– Guaranteed income
– Simple program because give on basis of
need
– Monetary and non-monetary costs (time)
Impacts
• 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)
• 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)
• 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
• 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
• 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?
• 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
– 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
– 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
• 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
Age and Health
Does not working = poverty?
• 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
Elderly are less likely to be poor
than the non-elderly
Poverty Rate
Elderly
12.5%
Age 18-64
13%
Under age 18
18.7%
70% of the poor elderly are
women
• 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
• 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
Year
Total
Male
Female
2004
2000
1995
77.6
76.3
75.7
74.8
73.5
72.4
80.1
79.1
79.0
1990
1985
1980
1975
75.4
74.7
73.7
72.6
71.8
71.1
70.0
68.8
78.8
78.2
77.4
76.6
1970
1960
1950
70.8
69.7
68.2
67.1
66.6
65.6
74.7
73.1
71.1
1940
62.9
60.8
65.2
What are the leading causes of
death?
Total Deaths from All Causes
WA State Death Certificates, 2000
Heart Disease
25.8
Can cer
24.3
Stroke
8.4
COPD
6.0
Un in t. In ju ry
4.7
Alzh eimer' s
4.1
Diab etes
3.0
Flu & Pn eu mon ia
2.3
Su icid e
1.7
L iver Disease
1.1
18.5
All Oth er
0
10
20
Percent of All Deaths
30
Total Deaths from All Causes
Age and Gender
WA State Death Certificates, 1998-2000
85+
75-84
65-74
55-64
45-54
35-44
25-34
15-24
5-14
1-4
<1
0
5000
10000
15000
Rate per 100,000
Female
Male
20000
Sources of Income
• 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?
• 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…
• This is a group of Nonparticipants
• Important to look at why???
– Makes the relationship of not working =
poverty not as direct
Chapter 6
Family Size and Structure
“The Feminization of
Poverty”
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
• 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
• 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
• 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
• 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
• 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
• 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??
• 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??
• 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 the value of exchange is greater than
ONE
value of glove
For Jack 
1
value of ball
value of ball
For Jim 
1
value of glove
• So…trade when the benefits > costs
Example
Gus
Harry
Lawn
40 minutes
120 minutes
Garden
80 minutes
120 minutes
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!!!
• 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
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
• 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
Elizabeth
Apples
20
Elizabeth
Bread
0
10
10
0
20
Brian Apples
Brian Bread
0
15
30
10
5
0
Comparative Advantage
• 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?
• 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?
Elizabeth
Apples
Elizabeth
Bread
20
0
10
10
0
20
• 10 loaves of bread
• Opportunity Costs
– 10 Bread = 10 Apples
– 1 Bread = 1 Apple
What are the opportunity
costs?
• Brian
– If only produce bread
how many apples does
she give up?
Brian
Apples
Brian
Bread
0
10
15
5
30
0
• 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?
• 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
• 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
– 8 loaves (0 + 8 traded)
• Brian Apples
– 18 apples (30 -12 traded)
• Are they better off??
Are they better off??
No
Specialization Gains from
Specialization
and Trade
trade
or Trade
Elizabeth
Bread
Elizabeth
Apples
Brian
Bread
Brian
Apples
Are they better off??
Elizabeth
Bread
Elizabeth
Apples
Brian
Bread
Brian
Apples
No
Specialization Gains from
Specialization
and Trade
trade
or Trade
10
10
5
15
Are they better off??
Elizabeth
Bread
Elizabeth
Apples
Brian
Bread
Brian
Apples
No
Specialization Gains from
Specialization
and Trade
trade
or Trade
10
12
10
12
5
8
15
18
Are they better off??
Elizabeth
Bread
Elizabeth
Apples
Brian
Bread
Brian
Apples
No
Specialization Gains from
Specialization
and Trade
trade
or Trade
10
12
+2
10
12
+2
5
8
+3
15
18
+3
Both are Better off!!
Can you do it??
United States
United Kingdom
Clothing
Food
Clothing
Food
40
0
60
0
20
20
30
10
0
40
0
20
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
Comparative Advantage
Homework
• 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
UK
UK
US
US
Camera vacuum Camera vacuum
s
s
s
0
1200 0
2200
600
600
2400 1000
800
0
3360 0
Back to Becker’s Theory of
Marriage
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?
• 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…
• 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
• Median earnings for a full time male worker
has declines since 1973
• Why???
– Labor pool has increased
Wage
Ls
Ls’
W1
W2
Ld
1 2
# workers
Welfare Benefits
• 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
• 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
• Females are left with only a few “good” men
to choose from
• Probability of marriage is low
Changes in Social Norms &
Attitudes
• 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??
• 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
– 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
• Children can grow up with
– Limited resources
– Poor nutrition levels
– Inadequate medical services
– Low investments in human capital
• Intergenerational transmission of poverty