Chapter 3 The HouseholdChapter 3 The HouseholdChapter 3 The HouseholdChapter 3 The Household

• Households in the U.S.

• The Economics of the Household

• Marriage & Divorce

• Households in the U.S.

• The Economics of the Household

• Marriage & Divorce

I. Households (HH) in the U.S.I. Households (HH) in the U.S.I. Households (HH) in the U.S.I. Households (HH) in the U.S.

• 290 million people (2001)

• 109 million HH• HH is people who occupy same

housing unit

(house, apt. , dorm room)• Family HH includes related people

• 290 million people (2001)

• 109 million HH• HH is people who occupy same

housing unit

(house, apt. , dorm room)• Family HH includes related people

$42,228

$24,386

$52,275$60,471

$25,745 $36,590

All Households

Nonfamily Ho...

Family House...

Married Couple

Female headed

Male headed

U.S. Households Median Income 2001

U.S. Family Households, 2001

76%

18%

6%

Married Couple Female headed Male headed

All Married Couples, 2001

22% 56%

6%

16%

Both in Labor Force Only Husband in Labor Force

Only Wife in Labor Force Neither in Labor Force

Married HH Median Income, 2001

$70,000

$50,000

$37,000$28,000

$0$10,000$20,000$30,000$40,000

$50,000$60,000$70,000$80,000

Both in LaborForce

Only Husband inLabor Force

Only Wife inLabor Force

Neither in LaborForce

Size of Households in the U.S., 2001

16%

15%

10%

25%

34%

1 person 2 persons 3 persons

4 persons 5 or more persons

II. The Economics of the HHII. The Economics of the HHII. The Economics of the HHII. The Economics of the HH

• Decision to form a household• Weigh benefits and costs• Form HH if benefits > costs

• Over 75% of HH contain more than 1 person• So must be benefits to forming

multiperson HH• focus on multiperson HH

• Decision to form a household• Weigh benefits and costs• Form HH if benefits > costs

• Over 75% of HH contain more than 1 person• So must be benefits to forming

multiperson HH• focus on multiperson HH

Benefits/Costs to HHBenefits/Costs to HHBenefits/Costs to HHBenefits/Costs to HH

• Economies of scale

• Externalities

• Transactions costs

• Risk sharing

• Economies of scale

• Externalities

• Transactions costs

• Risk sharing

Economies of scaleEconomies of scaleEconomies of scaleEconomies of scale

• mostly a benefit

• Things done on a large scale can be done more efficiently• Many HH chores done for 1

person,

are just as easy to do for 2 or 3 people

• mostly a benefit

• Things done on a large scale can be done more efficiently• Many HH chores done for 1

person,

are just as easy to do for 2 or 3 people

examplesexamplesexamplesexamples

• Cooking for 1 vs. 2• Cleaning, shopping, laundry

• In HH with more than 1• Less time spent PER PERSON

on these tasks• Tasks are shared

• Cooking for 1 vs. 2• Cleaning, shopping, laundry

• In HH with more than 1• Less time spent PER PERSON

on these tasks• Tasks are shared

• Buying in bulk

• Share fixed costs of HH• Furniture• Appliances• Bills (phone, cable…)

• Buying in bulk

• Share fixed costs of HH• Furniture• Appliances• Bills (phone, cable…)

• if HH is really large,• diseconomies of scale as tasks

take longer

• if HH is really large,• diseconomies of scale as tasks

take longer

ExternalitiesExternalitiesExternalitiesExternalities

• a benefit or cost

• consumption or production of a good or service,

affects well-being of others

(not just producer or buyer)

• a benefit or cost

• consumption or production of a good or service,

affects well-being of others

(not just producer or buyer)

positive externalitiespositive externalitiespositive externalitiespositive externalities

• benefits to living in HH

• enjoy roommate’s good cooking

• enjoy listening to roommate’s CD

• roommate rents movie, you watch it too

• benefits to living in HH

• enjoy roommate’s good cooking

• enjoy listening to roommate’s CD

• roommate rents movie, you watch it too

negative externalitiesnegative externalitiesnegative externalitiesnegative externalities

• a cost to living in a HH

• roommate • smokes• snores• is noisy• has bad taste in music, decor, …

• a cost to living in a HH

• roommate • smokes• snores• is noisy• has bad taste in music, decor, …

transactions coststransactions coststransactions coststransactions costs

• cost of acquiring goods & services

• cost of enforcing agreements

• may be benefit or cost to HH living

• cost of acquiring goods & services

• cost of enforcing agreements

• may be benefit or cost to HH living

• lower transactions costs• divide errands, chores

• higher transactions costs• keeping track of who owes what• coordinating schedules

• lower transactions costs• divide errands, chores

• higher transactions costs• keeping track of who owes what• coordinating schedules

RiskRiskRiskRisk

• HH with multiple earners less likely to suffer financial distress

• HH with multiple earners better able to diversify • employers• investments

• HH with multiple earners less likely to suffer financial distress

• HH with multiple earners better able to diversify • employers• investments

Division of LaborDivision of LaborDivision of LaborDivision of Labor

• we observe• men tend to be larger earner in HH

(sole earner 22% of HH)• women in HH spend more time on

housework, childcare, etc

• we observe• men tend to be larger earner in HH

(sole earner 22% of HH)• women in HH spend more time on

housework, childcare, etc

• men specialize in market work• paid work

• women specialize in nonmarket work• unpaid work

• not necessarily complete specialization

• men specialize in market work• paid work

• women specialize in nonmarket work• unpaid work

• not necessarily complete specialization

• how do we build a model to explain this?• gains from specialization & trade

• how do we build a model to explain this?• gains from specialization & trade

example: Ed & Lizexample: Ed & Lizexample: Ed & Lizexample: Ed & Liz

• choose between market & nonmarket work

• Liz• $500 week in market work OR• $400 week in nonmarket work OR• something in between

• choose between market & nonmarket work

• Liz• $500 week in market work OR• $400 week in nonmarket work OR• something in between

• Ed• $1000 week in market work OR• $420 week in nonmarket work OR• something in between

• Ed• $1000 week in market work OR• $420 week in nonmarket work OR• something in between

market

nonmarket

1000

420

500

400

Ed

Liz

• Ed has absolute advantage in BOTH market & nonmarket work• 1000 > 500• 420 > 400

• why did he marry Liz?• still gains from specializing &

sharing output

• Ed has absolute advantage in BOTH market & nonmarket work• 1000 > 500• 420 > 400

• why did he marry Liz?• still gains from specializing &

sharing output

comparative advantagecomparative advantagecomparative advantagecomparative advantage

• Liz is close to Ed in nonmarket production• but way worse in market

production• Liz has comp. adv. in nonmarket

work• gains to specializing

• Liz is close to Ed in nonmarket production• but way worse in market

production• Liz has comp. adv. in nonmarket

work• gains to specializing

case 1: Ed & Liz do not sharecase 1: Ed & Liz do not sharecase 1: Ed & Liz do not sharecase 1: Ed & Liz do not share

• time divided• 60% market work• 40% nonmarket work• do not share

• time divided• 60% market work• 40% nonmarket work• do not share

• Liz• $300 in market work• $160 in nonmarket work

• Ed• $600 in market work• $168 in nonmarket work

• Liz• $300 in market work• $160 in nonmarket work

• Ed• $600 in market work• $168 in nonmarket work

market

nonmarket

1000

420

500

400

case 2: Ed & Liz specializecase 2: Ed & Liz specializecase 2: Ed & Liz specializecase 2: Ed & Liz specialize

• Ed does market work• gives Liz 35%

• Liz does nonmarket work• gives Ed 50%

• Ed does market work• gives Liz 35%

• Liz does nonmarket work• gives Ed 50%

resultsresultsresultsresults

• Ed• produces $1000• gives Liz $350, keeps $650

• Liz • produces $400• gives Ed $200, keeps $200

• Ed• produces $1000• gives Liz $350, keeps $650

• Liz • produces $400• gives Ed $200, keeps $200

• Ed• $650 market, $200 nonmarket• (case 1: $600, $168)

• Liz• $350 market, $200 nonmarket• (case 1: $300, $160)

• Ed• $650 market, $200 nonmarket• (case 1: $600, $168)

• Liz• $350 market, $200 nonmarket• (case 1: $300, $160)

market

nonmarket

1000

420

500

400

Liz

Ed

By specializing,

both Ed and Liz do better

why does this work?why does this work?why does this work?why does this work?

• each specialize in what they do best,• relative to their partner

• Liz specializing in nonmarket work

frees Ed to specialize in market work• which he does way better

• each specialize in what they do best,• relative to their partner

• Liz specializing in nonmarket work

frees Ed to specialize in market work• which he does way better

• specialization does NOT have to be complete for there to be gains• 56% of married households both

spouses in labor force

• specialization does NOT have to be complete for there to be gains• 56% of married households both

spouses in labor force

• if men tend to have ab. or comp. adv. in market work,• see men specializing in mkt. work,• women specializing in nonmkt.

work

• if men tend to have ab. or comp. adv. in market work,• see men specializing in mkt. work,• women specializing in nonmkt.

work

• men have absolute adv. in market work because they earn more• gender earning gap reinforces the

gender earnings gap

• men have absolute adv. in market work because they earn more• gender earning gap reinforces the

gender earnings gap

applicationapplicationapplicationapplication

• we observe that married men earn more than unmarried men• 10-25% more when controlling for

other differences

(like age, education…)• “marriage premium”

• we observe that married men earn more than unmarried men• 10-25% more when controlling for

other differences

(like age, education…)• “marriage premium”

why?why?why?why?

• division of labor• married men have wife to

specialize in nonmarket work

(better focus on market work)

• division of labor• married men have wife to

specialize in nonmarket work

(better focus on market work)

• marriage is a signal:• employer prefers married men,• seen as more responsible, etc.

• self selection:• people who get married tend to be

more responsible, etc. in the first place

• marriage is a signal:• employer prefers married men,• seen as more responsible, etc.

• self selection:• people who get married tend to be

more responsible, etc. in the first place

$18,001$15,779

$36,920

$17,717

$29,892$23,595

$0

$10,000

$20,000

$30,000

$40,000

single married divorced

Median Income, 2001Men Women

drawbacks to specializationdrawbacks to specializationdrawbacks to specializationdrawbacks to specialization

• affects “power balance” in HH• does partner that earns the $ get to

make the decisions

• divorce• partner specializing in nonmarket

work at a disadvantage

• affects “power balance” in HH• does partner that earns the $ get to

make the decisions

• divorce• partner specializing in nonmarket

work at a disadvantage

• nonmonetary issues• value of family time• stress & illness

• nonmonetary issues• value of family time• stress & illness

III. Marriage & DivorceIII. Marriage & DivorceIII. Marriage & DivorceIII. Marriage & Divorce

• marriage is a contract for HH formation• specialization more likely

• marriage has origins as economic arrangement

• marriage is a contract for HH formation• specialization more likely

• marriage has origins as economic arrangement

divorce & specializationdivorce & specializationdivorce & specializationdivorce & specialization

• if spouse specialized in nonmarket work,• necessary to place value on that

contribution

• if spouse specialized in nonmarket work,• necessary to place value on that

contribution

No Fault divorceNo Fault divorceNo Fault divorceNo Fault divorce

• obtain divorce without cause

• obtain divorce without consent of spouse

• arose in 1970s• cause or consequence of rising

divorce rates?

• obtain divorce without cause

• obtain divorce without consent of spouse

• arose in 1970s• cause or consequence of rising

divorce rates?

ConsequencesConsequencesConsequencesConsequences

• less costly to break marriage contract

• alimony for women much less common

• spouses have less leverage to extract financial settlement

• less costly to break marriage contract

• alimony for women much less common

• spouses have less leverage to extract financial settlement

1985 Weitzman1985 Weitzman1985 Weitzman1985 Weitzman

• economic consequences of divorce• women’s income decreases 27%• men’s income increases 10%

• consequences of women specializing in nonmarket work

• economic consequences of divorce• women’s income decreases 27%• men’s income increases 10%

• consequences of women specializing in nonmarket work

1999 Braver1999 Braver1999 Braver1999 Braver

• women’s income decreases 1%

• men’s income increases 2%

• today women more likely to be in the labor force

• better child support enforcement

• women’s income decreases 1%

• men’s income increases 2%

• today women more likely to be in the labor force

• better child support enforcement

men and divorcemen and divorcemen and divorcemen and divorce

• disadvantages to specializing in market work• courts still favor women in custody

decisions• limited control of child support

payments

• disadvantages to specializing in market work• courts still favor women in custody

decisions• limited control of child support

payments

divorce is costly to both partiesdivorce is costly to both partiesdivorce is costly to both partiesdivorce is costly to both parties

• legal costs

• splitting 1 HH into 2 HH• acquire 2 of everything• lose economies of scale

• legal costs

• splitting 1 HH into 2 HH• acquire 2 of everything• lose economies of scale

Government & marriageGovernment & marriageGovernment & marriageGovernment & marriage

• NOT neutral

• policies that favor & penalize marriage

• legal rights• medical, financial decisions• property inheritance• adoption

• NOT neutral

• policies that favor & penalize marriage

• legal rights• medical, financial decisions• property inheritance• adoption

taxestaxestaxestaxes

• nonmarket work is valuable, but not taxed• implicit tax advantage to 1 earner

HH

• nonmarket work is valuable, but not taxed• implicit tax advantage to 1 earner

HH

marriage penaltymarriage penaltymarriage penaltymarriage penalty

• some married couples pay higher taxes than if they were single• worst in 2-earner HH where

incomes are close

• married couples with very unequal incomes have marriage bonus

• some married couples pay higher taxes than if they were single• worst in 2-earner HH where

incomes are close

• married couples with very unequal incomes have marriage bonus

How it works (2002)How it works (2002)How it works (2002)How it works (2002)Married filing jointly Single

income $100,000 $50,000std. deduction ($7,850) ($4,700)

taxable income $92,150 $45,300

tax $18,670 $8,58417,168

marriage penalty of $1502

2001 tax changes2001 tax changes2001 tax changes2001 tax changes

• reduced marriage penalty

• further reductions in 2003 taxes• reduced marriage penalty

• further reductions in 2003 taxes

Social security benefitsSocial security benefitsSocial security benefitsSocial security benefits

• spouse is entitled to a benefit at least 50% as large as working spouse’s benefit• even if never in labor force

• 1 earner HH may receive same SS benefits as 2 earner HH• but paid less in payroll taxes

• spouse is entitled to a benefit at least 50% as large as working spouse’s benefit• even if never in labor force

• 1 earner HH may receive same SS benefits as 2 earner HH• but paid less in payroll taxes

SummarySummarySummarySummary

• look at U.S. HH

• benefits & costs to HH formation

• net benefits to forming married HH• division of labor

-- market vs. nonmarket work• costly when HH splits

• look at U.S. HH

• benefits & costs to HH formation

• net benefits to forming married HH• division of labor

-- market vs. nonmarket work• costly when HH splits