the family as an economic unit

The Familyas an

Economic Unit

The Neoclassical Modelof Specialization & Exchange

Basic underlying assumption:

The family is a unit whose adult members make informed and rational decisions that maximize the well-being of the family.

Family well-being or utility is maximized by selecting the combination of commodities from which the family derives the greatest satisfaction.

These commodities are produced by combining home time of family members with goods and services purchased in the market using labor market earnings.

One such commodity might be a family evening at home watching a movie on TV. This commodity requires a TV and the time of the family members spent watching it.

Law of Comparative AdvantageThe total output of a group, an economy, a group of nations or a family will be greatest when the output of each good is produced by the person (or firm or nation) with the lowest opportunity cost.

It is frequently the case that women are relatively more productive in the home and men are relatively more productive in the market.This can be true because men and women are traditionally raised with different expectations and receive different education and training. It may also be the case that women are discriminated against in the labor market and that discrimination lowers their market earnings.Moreover, the traditional division of labor is likely to magnify differences in the household and market skills of men and women because both types of skills tend to increase with experience.

While the preceding factors tend to produce gender differences in comparative advantage for homemaking versus market work, it is not necessarily the case that the traditional division of labor is the optimal arrangement.

Raising children according to gender rather than individual talents and discriminating against women workers in the labor market introduces distortions.

To the extent that women’s relative advantage for homemaking is socially determined and reflects unequal access to market opportunities, the traditional division of labor is not always efficient or desirable.

In the following discussion, we assume that women have a comparative advantage in housework relative to men, because we are exploring a reality in which women generally have primary responsibility for homemaking.

This does not imply that the traditional division of labor is inevitable or that it will persist indefinitely into the future.

Example of gains from specialization & exchange

Consider two people: Dave and Diane.

Dave

Dave makes $10 an hour in the labor market. Alternatively, with an hour he can produce $5 worth of home production (perhaps a mediocre dinner).

So for Dave, the opportunity cost of $10 worth of home production is two hours of market work, which is worth $20.

For Dave the opportunity cost of $10 worth of market goods is one hour of home production, which is worth $5.

Diane

Diane makes $15 an hour in the labor market. Alternatively, with an hour she can produce $15 worth of home production (perhaps a very good dinner).

So for Diane, the opportunity cost of $10 worth of home production is 2/3 of an hour or 40 minutes of market work, which is worth $10.

For Diane, the opportunity cost of $10 worth of market goods is 2/3 of an hour or 40 minutes of home production, which is worth $10.

Suppose Dave and Diane both work and perform home production.

Value of Market Goods

Value of Home Production

Total Value

Dave 6 hrs x $10 = $60 2 hrs x $5 = $10 $70

Diane 7 hrs x $15 = $105 1 hrs x $15 = $15 120

Total $165 $25 $190

Comparison of opportunity costs

PersonOpp. cost of $10 of home production

Opp. cost of $10 of mkt production

Dave $20 $5

Diane $10 $10

So, we can see that Dave has a lower opportunity cost of market production and therefore a comparative advantage in market production. Diane has a lower opportunity cost of home production and therefore a comparative advantage in home production.

The law of comparative advantage indicates that their total production should be greater if there is specialization and Dave does more work and less home production and Diane does less work and more home production.Suppose Diane reduces her market work by 1 hour & increases her home production by 1 hour, while Dave does an additional 2 hours of market work instead of his 2 hours of home production.

By having Dave only do market work, in which he has a comparative advantage, and having Diane do the home production, in which she has a comparative advantage, they have increased their total production value by $10, from $190 to $200.

Value of Market Goods

Value of Home Production

Total Value

Dave 8 hrs x $10 = 80 0 hrs x $5 = $0 $80

Diane 6 hrs x $15 = $90 2 hrs x $15 = 30 120

Total $170 $30 $200

Note that it is comparative advantage, not absolute advantage, that makes possible the gains from specialization and exchange. In the example we used here, Diane had an absolute advantage over Dave in both market and home production. In an hour she could make either $15 of market production or $15 of home production, while Dave, in a hour, could only make $10 of market production or $5 of home production.

Let’s look at the story using a graph.

Mkt Production ($)

Home Production ($)

Suppose each person has 8 hours a day to allocate to market and/or home production. Remember, in a hour Dave can make either $10 dollars of market production or $5 of home production. So if he only does market work, he’ll have $80 worth of production, and if he only does home work, he’ll have $40 work of production. So Dave’s production possibility frontier has a slope of -2, which is the rate at which he trades market production for home production.

Dave80

40

Mkt Production ($)

Home Production ($)

Diane

120

120

Remember, in a hour Diane can make either $15 dollars of market production or $15 of home production. So if she only does market work, she’ll have $120 worth of production, and if she only does home work, she’ll have $120 work of production. So Diane’s production possibility frontier has a slope of -1, which is the rate at which she trades market production for home production.

Mkt Production ($)

Home Production ($)

If Dave & Diane combine production and they both do only home work (pt. H), they’ll have $160 of production. If they both do only market production (pt. M), they’ll have $200 of production.

H 160

M200

Y

Mkt Production ($)

Home Production ($)

200

160

Starting from H, with both doing only home work, if they were to exchange some home time for market time, it would be some of Dave’s time they trade first since we found earlier that he has a lower opportunity cost of market production & a higher opportunity cost of home production. So they’re initially trading at his tradeoff rate (slope = -2).

Y

H

M

Mkt Production ($)

Home Production ($)

200

160

If they trade all of Dave’s home production time for work time but none of Diane’s, they will be at Y. They have $120 of home production and $80 of market production. Y

120H

M

80

Mkt Production ($)

Home Production ($)

200

160

At points between H & Y, Diane does only home work and Dave does both home & market work.

Y

120H

M

80

Mkt Production ($)

Home Production ($)

200

160

At points between Y & M, Dave does only market work and Diane does both home work & market work.

Y

120H

M

80

Mkt Production ($)

Home Production ($)

200

160

At points between Y & M, they are exchanging Diane’s home production time for her market time, so the slope of the production possibility frontier (PPF) is based on her tradeoff rate of –1. That’s why the PPF is flatter at the top than at the bottom.

Y

H

M

Mkt Production ($)

Home Production ($)

200

160

What determines the point on the PPF at which they operate?That depends on their tastes, that is, their preferences for market goods versus home goods. To understand that, we need the concept of indifference curves.

Y

H

M

Indifference Curve:

A curve that shows the consumption alternatives that yield the same level of satisfaction or utility.

In other words, a couple is indifferent between the points on the indifference curve.

Characteristics of indifference curves:

1) Downward sloping (negative slope)

2) Two curves cannot intersect.

3) Each point on the graph has exactly one indifference curve passing through it.

4) Utility is greater for curves that are higher and further to the right.

5) Usually assumed to be convex.

Home Production ($)

Mkt Production ($)

U2U1

U3

U4

Indifference curves are downward sloping because you can be equally happy with fewer goods from market production if you have more goods from home production. At point B you have fewer goods from market production than at point A, but you have more goods from home production.

Home Production ($)

Mkt Production ($)

U1

8

3

4 10

A

B

Indifference curves can not intersect, because that would imply that the point of intersection gives two different levels of satisfaction.Point A gives the satisfaction associated with U1 but also the satisfaction associated with U2.

Home Production ($)

Mkt Production ($)

U2

U1

A

Each point on the graph has exactly one indifference curve passing through it.

For any point you can pick, there is one indifference curve passing through it.

Home Production ($)

Mkt Production ($)



Home Production ($)

Mkt Production ($)

A



Home Production ($)

Mkt Production ($)

U1

A

Utility is greater for curves that are higher and further to the right.Indifference curve U1 has a lower utility or satisfaction level than U2

Home Production ($)

Mkt Production ($)

U2U1

Utility is greater for curves that are higher and further to the right.Indifference curve U1 has a lower utility or satisfaction level than U2,and U2 has a lower utility level than U3

Home Production ($)

Mkt Production ($)

U2U1

U3

Home Production ($)

Mkt Production ($)

U2U1

U3

U4

Utility is greater for curves that are higher and further to the right.Indifference curve U1 has a lower utility or satisfaction level than U2,and U2 has a lower utility level than U3,and U3 has a lower utility level than U4.

Indifference curves are usually assumed to be convex.This means that the magnitude of the slope decreases as you move from left to right.At a point like A, where market goods are relatively plentiful and home goods are relatively scarce, it would take a fairly large amount of market goods ($10) to induce a couple to give up a little bit of home goods ($2) and still remain equally well off.

Home Production ($)

Mkt Production ($)

U1

A

B110

100

8 10

At a point like C, where home goods are relatively plentiful and market goods are relatively scarce, it would only take a small amount of market goods ($3) to induce a couple to give up even a fairly large amount of home goods ($12) and still remain equally well off. This seems realistic because when

goods are scarcer they are usually valued more highly.

Home Production ($)

Mkt Production ($)

U1

CD85

100 112

Now we can combine the production possibilities frontier (PPF) with the indifference curves to see what choices a couple would make.

A couple will choose a point where they have the highest level of satisfaction that they can achieve given their PPF.

Home Production ($)

Mkt Production ($)

U2U1

U3

U4

B

A

C

No points on U4 are attainable. Notice that both point A on U1 and point B on U2 make full and efficient use of resources, but they do not maximize the couple’s satisfaction.The couple is best off at point C on U3 .

Home Production ($)

Mkt Production ($)

U2U1

U3

U4

B

A

C

In this particular case, Dave does only market work and Diane doesboth home work &market work. The couple has relatively strong preferences for market goods.

Home Production ($)

Mkt Production ($)

U2U1

U3

U4

A

In this case, the couple would be best off at point A on U3 . Here, Diane does only home production and Dave does both home work & market work.The couple has relatively strong preferences for home goods.

Home Production ($)

Mkt Production ($)

U2

U1

U3

U4

A

In this intermediate case, the couple would be best off at point A on U3 . Here, Diane does only home production and Dave does only market work.

These advantages include 1. Economies of scale2. Public goods 3. Externalities in consumption4. Opportunities for marriage-specific

investments5. Risk pooling and6. Institutional benefits

There are other advantages to forming a family, besides gains from specialization and exchange.

Economies of scale

Housing for two people does not cost twice as much as housing for one.

It does not take twice as long to prepare meals for two people as it does to prepare them for one person.

Public goods

A public good has the characteristic that the consumption of the item by one person does not diminish the amount available for consumption by others.For example, if there is a movie on television, the amount of consumption and satisfaction an individual obtains from the movie is probably not reduced if another person is watching it too.

Externalities in consumption

When two people care for one another, one partner may derive satisfaction from the enjoyment and happiness of the other.

Opportunities for marriage-specific investments

Marriage-specific investments refers to the development of skills, knowledge, and other items that are worth more in the marriage than if the marriage were terminated.The prime example is the rearing of children. Children provide their parents with considerable satisfaction. However, they may form an obstacle to forming a new relationship with another partner.

Risk pooling

If one spouse becomes unemployed, the couple can rely on the other spouse to cover at least part of the household expenses.

Institutional benefits

These benefits include coverage by a spouse’s health insurance, pension benefits, and Social Security benefits.

There are also potential problemsassociated with specialization of market and household production.

Market/Household Specialization - Problem 1

It is unlikely that one person has a comparative advantage in all household tasks. It is therefore likely that both members of a couple will do some household production.

Furthermore, if the level of utility or disutility of work is influenced by the amount performed, it may be preferable that both members of a couple do both market and household production.


An individual’s comparative advantage may not remain constant over the life cycle.The value of home production for women is greatest during the child-rearing years and declines as the children grow up and become more self-sufficient.In addition, labor market earnings increase with experience and decline as skills depreciate during periods out of the labor force.So a woman pays a high price in terms of career advancement and earnings when she exits the labor force to care for children and then re-enters the labor force later.


There are costs of interdependence.When each spouse is able to manage a household and earn a living, the family will not be devastated if the “breadwinner” is laid off or if the “caregiver” becomes seriously ill.Each will also be better equipped to manage alone in the case of divorce or death.


When there are differences of opinion, the “breadwinner” tends to dominate and the homemaker’s wishes become subordinate.In families where husband and wife have similar earning power, they are more likely to make major decisions jointly.


Spouses who are not employed are less likely to have the financial means to leave an abusive relationship.

Bargaining Models of Families

The neoclassical model of the family assumed that families operate efficiently and without friction either because there is a consensus on preferences or because decisions are made by an altruistic family head and are accepted by the other members. Bargaining models do not make this assumption and allow for differences of opinion.

Bargaining Models of Families – cont’d

In these models, the bargaining power of each spouse is determined by his/her threat point, the level of well-being that each would attain if they cannot reach a cooperative solution within the marriage. The final solution to a problem is likely to more closely reflect the preferences of the party with the stronger threat effect, who is better able to walk away from the deal.

Bargaining Models of Families – cont’d

Factors affecting threat points include • an individual’s control of resources outside the

marriage, • laws defining division of marital property, • the probability of remarriage, and • eligibility rules for benefit levels under welfare

programs.

Perspectives on the Familyof Other Schools of Thought

Other perspectives on the family include the Marxist and Radical Feminist approaches.Like the bargaining models, they focus on the role of power and the potential for exploitation.

Marxists

Marxists see the capitalist economy as one in which capitalists wield power over workers who do not own the means of production and are therefore forced to sell their labor for low wages. They see women as doubly exploited because they supply unpaid services in the family and that enables capitalists to pay workers low wages.

Radical Feminists

Although radical feminists recognize the existence of emotional ties and some unified interests within the family, they see the family as the locus of struggle and women’s oppression.They see the usual household division of labor as not merely the result of private decisions but to a great extent influenced by patriarchal tradition.

Nonmarket Work

Economists have traditionally focused their attention on market work.However, much work is performed outside the market, both in the household and in the voluntary sector.Such work contributes substantially to the well-being of individuals, their families, and society at large.

Although the division of labor remains quite unequal, the difference in the allocation of time to market work and nonmarket work has narrowed over time.

Let’s look at some of the numbers.

Men do more hours of market work than women do.

Interestingly, though, when employed married women are compared to married men with employed wives, the difference is relatively small.

First, consider hours spent per week in market work.

Women do more unpaid work than men.

This is also true when married women are compared to married men.

While the gap is smaller, employed married women still do more unpaid work than married men with employed wives.

Now, consider hours spent per week in unpaid work (housework, grocery shopping, and care of household members).

Allocation of houseworkin various types of households

In both married couple households and households of cohabitating men and women, women do considerably more housework than men, but the gender gap is wider among married couples.It has also been found that there is less specialization among partners in gay and lesbian couples.

Volunteer Work

Volunteer activities are defined as tasks performed without direct reward in money or in kind that mainly benefit others rather than the individuals themselves or their immediate family.

Patterns of Volunteering

Women volunteer at higher rates than men.Whites are more likely to volunteer than Blacks and Asians. Hispanics seem to have relatively low rates of volunteering.College graduates are more likely to volunteer than individuals with less education.Women who are employed part-time are more likely to do volunteer work than women who are employed full-time.

Gender Differences in Types of Volunteer Work

Women contribute more time to health organizations and educational institutions, while men do more volunteer work for civic and political organizations, as well as sport and recreational organizations.

Changes in the Demographic Compositionof the U.S. Population

Changes in the race and ethnic composition of the population are the result of changes in the patterns of immigration and differences in birth rates among various groups.The percent of the U.S. population that is Hispanic is increasing the most.The percent that is non-Hispanic black is also increasing.The percent that is non-Hispanic white is decreasing.

Intermarriage among race and ethnic groups has become more common.

In 2010, 6.9% of married couple households had a householder and spouse of different races.

Also, 4.3% of married couple households had one spouse who was Hispanic and the other was not.

From: https://www.census.gov/prod/cen2010/briefs/c2010br-14.pdf .

https://www.census.gov/prod/cen2010/briefs/c2010br-14.pdf

The “Typical” American Family?

It is clear that the American family today is very different from the 1950s television characterization of the American family, which was invariably white and consisted of a homemaker wife and breadwinner husband with two or three children and a dog.

“Why do Women Do the Lion’s Share of Housework?: A Decade of Research”

Literature Review by Lachance-Grzela & Bouchard (2010)

Research shows that over time, the average time spent by women on household tasks has decreased, the time spent by men has increased, and the total time spent on household labor has declined.However, in spite of women’s increased commitment to the labor force, they continue to perform the vast majority of the housework.

The drop in total housework done may be partially attributable to a trend toward smaller families, changes in household technology, and availability of market substitutes.

Stereotypically female tasks include routine tasks that are on-going, nondiscretionary, and very time-consuming.

They include laundry, cooking, cleaning up after meals and doing the dishes.

Stereotypically male tasks include intermittent tasks that are done only occasionally and are more flexible and less time-consuming.

They include household repairs, car maintenance, and yard work.

The literature reveals that the distribution ofhousehold labor is influenced by multiple forces.

From the microeconomic perspective, relative resources (such as income), time availability, and gender ideology are all important predictors of the gap between men’s and women’s household labor.

The greater the proportion of couple income that the wife earns, the less housework she does and the more her husband does.

The wife’s hours of market work increase her husband’s housework and decrease her own housework.

The husband’s hours of market work decrease his own housework and increase his wife’s housework slightly.

Wives with a more egalitarian gender attitude do less housework, but their husbands’ housework hours are unaffected. So the gap between housework done by the wife and the husband is reduced.Husbands with a more egalitarian gender attitude do NOT do more housework, but their wives do less. So, again the gap between housework done by the wife and the husband is reduced.

However, women still tend to do the bulk of housework even when they display the personal characteristics that favor a more egalitarian division of household labor.

Research has also explored the division of household labor from the macroeconomic perspective, examining the issue across countries.

It has been found that couples in more gender-egalitarian societies (such as Canada, Sweden, the U.S.) tend to divide housework more equally than those living in less gender-egalitarian societies (such as Chile, Italy, Japan), even when holding constant their individual characteristics.

Women in the most gender-equal nations perform an average of 15 hours of housework per week, whereas those in the less equal nations perform around 27 hours of housework per week.

Combining macro and micro perspectives, researchers have suggested that national-levelvariations in gender equality may play a moderating role in the relationship between micro-level factors (relative resources, time availability, and gender ideology) and the division of household labor.

That is, national levels of gender equality influence women’s ability to use gains made at the individual level to negotiate a more equal division of housework.

the family as an economic unit

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