Lecture 2 – ECMC54
Why Do Families Exist?
Why do families exist = why do individuals bond together
in more or less permanent groupings and share tasks such
as:
- Having, raising and supporting children
- purchase, production and consumption of meals and
necessities of life (i.e., sharing incomes and
housework)
- mutual care, affection, love and recreation
Something like the question “Why do firms exist?”
See Chapter 3
- neoclassical model of specialization and exchange
- other economic reasons
- why (too much) specialization may be
disadvantageous to women
- transaction cost, bargaining, other models of family
- what we know about changes in the household
division of labour
Neoclassical (Becker) model
Families have a productivity advantage.
Family members join and make division of labour decisions
to maximize utility of family members.
Two types of work: market work and home work. Both
are necessary to produce commodities. Individuals may
have different abilities, comparative advantage in one
type of production over another. Like theories of
international trade. Specialization according to
comparative advantage and trade with other country
(family member) maximizes output.
Obvious case –
Where each family member has absolute advantage in
one type of production
John produces $10 of value each hour in market work;
produces $5 of value in each hour of home work
Jane produces $5 of value each hour of market work;
produces $10 of value in each hour of home work.
If John and Jane remain separate, and each has 8 hours
of time per day, John might decide to do 6 hours market
work and 2 hours home work for total output of 6x$10 +
2 x $5 = $70. Jane might do 7 hours of market work and
1 hour of home work to 7x$5 + 1x$10 = $45.
If John and Jane co-operate, specialize and consume
together, John could specialize 100% in market work
(giving 8 x $10 = $80) and Jane could do 3 hours of home
work and 5 hours of market work (giving 3 x $10 + 5 x $5
= $55). Total output has risen from $115 to $135. And
market income has risen from $95 to $105, while the
value of home work has risen from $20 to $30.
Less obvious case – each has comparative advantage.
Dave produces $10 of value each hour in market work;
produces $5 of value in each hour of home work
Diane produces $15 of value each hour of market work;
produces $15 of value in each hour of home work. Diane’s
OC of $1 home work = $1 market. Dave’s OC of $1 home
work = $2 market. Comparative advantage = lower OC.
If Dave and Diane remain separate, and each has 8 hours
of time per day, Dave might decide to do 6 hours market
work and 2 hours home work for total output of 6x$10 +
2 x $5 = $70. Diane might do 7 hours of market work
and 1 hour of home work to 7x$15 + 1x$15 = $120.
If Dave and Diane co-operate, specialize and consume
together, Dave could specialize 100% in market work
(giving 8 x $10 = $80) and Diane could do 2 hours of
home work and 6 hours of market work (giving 2 x $15 +
6 x $15 = $120). Total output has risen from $190 to
$200. The value of market income has risen from $165
to $170 while the value of home work has risen from $25
to $30.
The example illustrates potential productivity gains due
to specialization and exchange within a family.
From Appendix
M2
M1
$80
M1 = 80 – (8/3)H1
$50
$30
Jim
H1
M2 = 50 – (5/9)H2
$90 H2
Kathy
For Jim, dM/dH = -8/3: OC(H) = 8/3
dH/dM = -3/8: OC(M) = 3/8
For Kathy, dM/dH = -5/9; OC(H) = 5/9
dH/dM = -9/5; OC(M) = 9/5
Kathy has the comparative advantage in home work
Jim has the comparative advantage in market work
Combine the PPF’s (assumes she does first home work; he
does first unit of market work, etc.)
M
M = 130 – (5/9)H, for
0<=H<=90, and
M = 80 – (8/3)(H-90),
for 90<=H<=120
$130
$80
$90
Combined
$120
H
Put the combined PPF on a per capita basis (representing
output per person if equally shared) and we can see
incentives to combine efforts
M
$80
$65
$50
$40
$30
$45
$60
Individual PPF’s and per capita combined
$90
H
This illustrates (again) potential gains from trade.
Look also at preferences to begin to get a sense of
decisions about division of labour. What difference do
different shaped utility functions make?
M
M = 130 – (5/9)H, for
0<=H<=90, and
M = 80 – (8/3)(H-90),
for 90<=H<=120
$130
$80
$90
Combined
$120
H
M
$130
$80
$90
Combined
$120
H
M
$130
$80
$90
Combined
$120
H
Different shaped indifference curves will affect division
of labour, but so will different productivities of two
partners.
But as long as comparative advantages differ, some
degree of specialization will be efficient.
What’s wrong (unrealistic) with this model?
1. constant productivities of home work and market
work
2. only two types of work – no sub types
3. increased productivity implies formation of family
(e.g., marriage)
4. productivity appears immutable, natural
5. single utility function for the family
6. no long term considerations – risk, accumulation of
human capital, changes through life cycle.
7. ignores effects on bargaining power, dangers of
specialization
What’s useful?
- rational basis for division of labour
- trends in divorce, marriage, labour force
participation could be explained by changing
comparative advantages and/or changing
preferences
Other economic advantages to family formation
1. Economies of scale in household operation
2. Public goods
3. Externalities in consumption
4. Marriage-specific investments
5. Risk-pooling
6. Institutional advantages/Discrimination against
other family types
Transaction Cost and Bargaining Model
- family does not operate by consensus
- transaction costs are minimized by long term
arrangements. Marriage creates rights and
responsibilities and rules for dissolution. Contract
that encourages marriage-specific investments, with
some protection.
- Bargaining power of each spouse is determined by
“threat-point” (alternative level of wellbeing/income). Affected by wealth, abilities, wage
rate, children, family law, probability of remarriage,
eligibility for benefits/welfare. All these affect
bargaining power over joint decisions.
- income/benefits to different family members may
change expenditure patterns/behaviours.
The facts on non-market work and the household
division of labour
In the U.S.
- amount of housework has declined over time for
women (1978-2000 down 5 hrs/wk for nonmarried,
11 hrs/wk for married, while men up 1 hour/wk)
- unequal division of market work/home work for
married partners (in 2000, she 28/18, he 43/7, but
she 34/16 if employed)
- women have increased market work considerably (20
hrs/wk in 1978 to 29 hrs/wk in 2000) while men
declined slightly.
In Canada