Labor Force Participation

1
Chapter 3

• Labor Force Participation

2
Are people poor because they dont 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

3
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

4
Why are people sub-employed??

• 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

5
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

6
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
• Cant work due to seasonal patterns

7

• 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

8
Price
AS
AD
AD
2
5
GDP (in trillions)
Unemployment because need 3 trillion less units
of the good
9
Natural Rate of Unemployment

• Frictional Seasonal Structural Cyclical
• Estimated at 5
• Can this figure ever be zero?
• Nowhy??
• Cyclical is the only type of unemployment that
  could even in theory be zero

10
Costs of Unemployment

• Economic
• Inefficient because not using all our resources
• Okuns 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

11
Roger and me

• Pick out as many costs of unemployment as you
  canthe person with the most will get extra
  credit!!!

12
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

13

14
Nonparticipants

• If you dont work you run the risk of povertybut
  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 dont work

15
Remember duration is important

• ½ of those who experience unemployment stay
  unemployed for greater than 5 weeks

16
Review

• Poor families receive most of their income from
  work
• Labor force participation is key
• Many are sub-employed
• Discouraged worker, underemployed, unemployed

17
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

18
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

19
Aggregate Supply
Price
AS

Quantity
20
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)

21
Phillips Curve
Inflation

Expected Rate of Inflation
Natural Rate Of Unemployment
Unemployment
22
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

23
Long Run Phillips Curve

• Represents equilibrium
• Vertical at the natural rate of unemployment

Inflation
Unemployment
Natural Rate
24
In-class exercise 9

• The Phillips Curve

25
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
Quantity
Q1
Q2
26
Summary

• Price increased
• Inflation did what??
• Increased
• Quantity decreased
• Unemployment did what??
• Increased
• Phillips Curve says they should move in the
  opposite direction!!

27
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

28
Inflation
Inflation
Unemployment
Unemployment
Liberals (Democrats) Dont Fight Inflation
Conservatives (Republicans) Fight Inflation
Big decrease in inflation with only Small
increases in unemployment
Small decrease in inflation but Big increases in
unemployment
29
Chapter 4

• The Working Poor

30
Is it possible to eliminate poverty by providing
everyone a job?

• Statistics say no!!
• Most of the poor population work
• Dont work enough
• Work part time or part year
• New problem
• Low wages

31
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

32
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

33
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

34
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

35

• 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 manybut the firm already had enough
• Higher wages will only increase the costs to the
  firm
• Everyone offers the same wagewhich is???
• MARKET EQUILIBRIUM WAGE

36
Wage
Wage
Ls
Ls
Ld
Ld
workers
workers
Market
Firm
37
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

38
In-class exercise 10

• What happens as workers change occupations?

39
Equilibrium Wages Can Change Overtime!!
Ls
Wage
Wage
Ls
Ls
Ls
W2
W1
W1
W2
Ld
Ld
N2
N2
N1
N1
workers
workers
Sales
Computer
40
Since Ld is downward sloping, if wage gets too
high will the firm stop hiring workers?

• NOworkers add to output and revenue

41
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

42
So

• Employ up to the point where the additional
  revenue (Marginal Revenue) just equals the
  additional cost (Marginal Cost) of that worker
• If MR gt MC what should the firm do
• Hire another worker
• If MC gt MR what should the firm do
• Dont hire

43
Does does MPL look like either of these?

MP
MP
Number of Workers
Number of Workers
44
MP
Stop Hiring
MRMC
MRgtMC
Hire
Dont Hire
MRltMC
Number of Workers
45
Marginal Revenue Product of Labor (MRPL)

• Value of the additional output produced
• MRPL MPL P

46
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

47
In-class exercise 11

• Hire or Not???

48
Why is the wage rate too low??MPL P wage

• MPL is too low
• MPL poor lt 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

49
Where does income come from?

• Wages
• Capital/assets
• Government transfers
• If first two do not equal some required minimum
  then the third entered

50
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

51
What can we do??

• Increase productivity
• Subsidize education
• Job placement
• Guaranteed minimum income
• Government intervention in the labor market
• Butgive people something for free and it
  decreases the incentive to get it on your own.

52
Chapter 11

• Welfare Programs

53
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

54
Chapter 11

• Welfare Programs

55
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

56

• Late 1960s Early 1970s Nixon supported a cash
  and food stamp program for the poor
• Republicans pushed harder for the cash transfers

57
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

58
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

59
Problems

• Exclusive reliance
• People will never escape poverty if the
  government gives freely
• Lead to perpetual poverty
• No work incentive

60
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 didnt 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

61

• General Assistance
• Given by each state
• Assistance for the needy

62
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
63
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 dont
  qualify
• Deserving vs. non-deserving

64
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

65
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

66
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?
• 51048 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

67
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

68
Did it make a difference?

• Basic structure

69
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?

70
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

71
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
• Butincome increased from 4800 to 6315.60
• 30 increase in income

72
In-class exercise 11

• Is there an incentive to work??

73
Now Graphically

Total Income
Gross Income
D
income
Basic support level
E
B
A
C
W
Benefits
Hours of work
74
What were those points?

• A individual doesnt 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

75
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 dont we do this??
• What will pay for the program?

76
Welfare has three distinct goals

• Provide income
• Provide work incentives
• Achieve cost minimization

77
Breakeven income

• 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

78
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

79
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

80

• 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

81
But

• Not all in-kind benefits increase a familys
  standard of living
• Not everyone is eligible for all three in-kind
  programs
• Nowadding these to our graph

82

Total Income
D
E
B

Gross Income
A
D
wage
Basic support level
E
B
A
C
W
Benefits
Hours of work
83
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)

84
When do we lose benefits?

• Medicaid
• Must earn lt 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

85
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

86
What has been tried?

• Negative income tax
• Guaranteed income
• Simple program because give on basis of need
• Monetary and non-monetary costs (time)

87
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??

88
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 povertywho do you help
  first?

89
Workfare(Regan administration)

• Force the poor to work to keep their benefits
• Pointgive back to the community that is
  providing for you
• Community service
• What about non-participants??
• Didnt really make a difference

90
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 jobenroll in training program
• If still no jobperform community service

91
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

92
What are the objectives of an income transfer
program?

• Adequacy
• People who can and cant work have access to
  adequate income levels
• Target Efficiency
• Target those who are most in need
• Administrative Efficiency
• Achieve goals at minimum cost

93

• 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

94

• 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

95
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!!

96
Chapter 5

• Age and Health

97
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

98
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
99
70 of the poor elderly are women

• Why??
• Men of that generation worked
• Mens life expectancy is shorter
• Women 80.1
• Men 74.8
• Women gain benefits from their husbands job but
  they are cut

100
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?
• Firms dont want to train
• Less productive
• Less flexible frame of mind
• Wont be able to work 40 hour weeks

101
Thusworking is really not an option

102
Life expectancy has been increasing

103
What are the leading causes of death?
104
(No Transcript)
105
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

106
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

107
Remember

• This is a group of Nonparticipants
• Important to look at why???
• Makes the relationship of not working poverty
  not as direct

108
Chapter 6

• Family Size and Structure
• The Feminization of Poverty

109
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

110
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

111
Questions to address

• Why has there been a rapid increase in FHH?
• Not necessarily a conscious choice
• Why do FHH have high poverty rates?

112
Causes of Growth in FHH

• Increased labor force participation by females
• 1950 30
• 1990 57.7
• Working outside the home decreased the dependence
  on mens wages
• Women are less likely to stay in an unhappy
  marriage

113
Gary Beckers 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???

114
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..

115
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

116
Productivity??

• Trade doesnt 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

117
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 Jims trade?
• Baseball glove
• What is the opportunity cost of Jacks trade?
• basketball

118
When will trade happen?

• When the value of exchange is greater than ONE
• Sotrade when the benefits gt costs

119
Example
Gus Harry
Lawn 40 minutes 120 minutes
Garden 80 minutes 120 minutes

Gus and Harrys garden and lawn look EXACTLY the
same upon completion
Harry offers to do ¾ of Guss garden if Gus mows
Harrys entire lawn
Should Gus agree to the trade??
120
YES!!!

• For Gus
• Mow his own lawn (40 minutes)
• Mow Guss 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 Harrys garden (120.75 90 minutes)
• Total (210 minutes) ? saved 30 minutes
• Both get everything done and have more leisure
  time

121
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.

122
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 Elizabeth Bread
20 0
10 10
0 20
Brian Apples Brian Bread
0 10
15 5
30 0
123
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

124
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?
• 10 loaves of bread
• Opportunity Costs
• 10 Bread 10 Apples
• 1 Bread 1 Apple

Elizabeth Apples Elizabeth Bread
20 0
10 10
0 20
125
What are the opportunity costs?

• Brian
• If only produce bread how many apples does she
  give up?
• 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

Brian Apples Brian Bread
0 10
15 5
30 0
126
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

127
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)

128

• Brian Bread
• 8 loaves (0 8 traded)
• Brian Apples
• 18 apples (30 -12 traded)
• Are they better off??

129
Are they better off??
No Specialization or Trade Specialization and Trade Gains from trade
Elizabeth Bread
Elizabeth Apples
Brian Bread
Brian Apples
130
Are they better off??
No Specialization or Trade Specialization and Trade Gains from trade
Elizabeth Bread 10
Elizabeth Apples 10
Brian Bread 5
Brian Apples 15
131
Are they better off??
No Specialization or Trade Specialization and Trade Gains from trade
Elizabeth Bread 10 12
Elizabeth Apples 10 12
Brian Bread 5 8
Brian Apples 15 18
132
Are they better off??
No Specialization or Trade Specialization and Trade Gains from trade
Elizabeth Bread 10 12 2
Elizabeth Apples 10 12 2
Brian Bread 5 8 3
Brian Apples 15 18 3
133
Both are Better off!!

134
Can you do it??
United States United States United Kingdom 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?
135
Homework 4

• Comparative Advantage

136
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 agree to the
  trade?

UK Cameras UK vacuum US Cameras US vacuums
0 1200 0 2200
600 600 2400 1000
800 0 3360 0
137
Back to Beckers 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

138
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

139
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

140
Declining Wages and increased unemployment of men

• Median earnings for a full time male worker has
  declines since 1973
• Why???
• Labor pool has increased

Ls
Ls
Wage
W1
W2
Ld
workers
1
2
141
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

142
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

143

• Females are left with only a few good men to
  choose from
• Probability of marriage is low

144
Changes in Social Norms Attitudes

• Out-of-wedlock birth stigma has disappeared
• Past
• Get pregnanttotal embarrassment
• Now
• Get pregnantjoin a support group
• Single parent is now an acceptable alternative to
  duel parent households

145
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

146

• Low welfare benefits
• Poverty rates would be lower if transfers were
  bigger
• Widows receive two times the amount of FHH
• Deserving versus non-deserving

147
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