Chapter 5: The households in the economy
1. Introduction:
Many would say that what is pivotal about industrialization is that the production
of goods has ceased to be an activity of the household. Women’s labor market
participation rose both in the period of the long post-Second World War boom up
until the start of the 1970s and in the period after it ended. There has been a decline
in the significance of the male breadwinner, whilst women, in addition to working
more outside the home, continue to perform most of the unpaid work inside it.
This chapter examines two routes to understanding these changes:
1-The first based on a neoclassical model of the household,
2-The second based on an institutional perspective.
Jacop Mincer and Gary Becker use the neoclassical assumptions of scarcity and
utility maximization to explain gender divisions within and outside the household,
in what became known as the “New Household Economics’ (NHE). Their
fundamental insight was to recognize that individuals do not just spend their time
either doing paid work or at leisure at home, but that there are also unpaid
productive activities which go on at home.
1.1 The household as an economic institution
A household is a unit consisting of people with a common budget who organize
some aspects of work and consumption together. Households are economic
institutions that use material and human resources to provision and support day-today existence.
2. Neoclassical approaches to household decision making
New Household Economics (NHE) was developed as an attempt to explain what
Mincer saw as ‘one of the most striking phenomena in the history of the American
labor force, the continuing secular increase in the participation rates of females,
particularly of married women. By extending the methods of neoclassical
economic analysis to the household, in order to investigate how the household unit
made decisions about labor allocation. The NHE uses the standard principle of
neoclassical economics: that rational economic agents exercise choice over the use
of scarce resources in order best to satisfy their preferences (maximize utility). In
doing this, the NHE extended the neoclassical analysis by:
1. Taking households rather than individual people as the rational decisionmaking units.
2. Analyzing labor supply decisions as the result of rational choices made
between income and time spent at home.
3. Recognize that time at home has competing uses; it is not all leisure.
4. Using the theory of comparative advantage and human capital theory to
analyze the division of labor between men and women in the household.
2.1 How do households decide what to do?
One neoclassical approach to household decision making is to treat the whole
household as if it were an individual, asingle decision-making unit with its own set
of preferences which can be represented by utility functions, in order to look at
how the New Household Economics uses them to examine the choices households
make.
2.2 How do households spend their time?
Neoclassical theory assumes that a household has a choice of how many
hours to spend earning money and how many to spend at home, much of
the time at home is spent on productive activities, so, from now on we will
just call such time ‘home time’. Work carried out in the market is paid a
wage. So the choice facing the household is how to combine market work,
which brings in desirable income, with home time, which the household
sees as desirable in itself. This choice is illustrated for a particular
household in Figure 5.2 where time is measured on the horizontal axis and
income on the vertical axis.
On the vertical axis, Y0 represents any unearned income; from property rents,
pensions or state benefits, for example. Unearned income is unlike income from
market work, it is not affected by any decision the household makes as to how to
spend its time.
Along the horizontal axis, time spent in the home is measured from left to right and
so time spent on market work is measured from right to left. The maximum amount
of time available for the household is
be 24 hours.
Tmax. For a one-person household it would
The income this household would receive if all its time were devoted to market
work is Ymax; it is its 'full' or maximum potential income. However, this income
can never be achieved because not all this time can be used for market work. Just
to survive, some time must be set aside for eating, sleeping, etc.
t
This time is shown as 0. Within these limits, the household has a choice as to how
many hours to spend on market work and how much to spend at home. Assuming
market work of any number of hours is available at the going wage rate, the line
ZR shows the possible levels of income which the household can receive at
different levels of market work.
Because time not spent at market work is time spent at home, this line is also the
household's budget constraint; it gives the combinations of the two desirable
goods, income and home time, that are feasible for the household. Figure 5.2 also
shows indifference curves connecting combinations of income and home time
between which the household is indifferent. As with consumer choice, maximum
utility will be achieved at point A, where the budget constraint is tangent to an
indifference curve. At this point, the household supplies
labor and receive Y1 income.
tmax– t1 hours of market
2.3 The household’s labor supply curve.
By exploring the effect of a change in the wage rate, we can derive the household’s
labor supply curve. Figure 5.3(a) shows how an increase in the wage rate increases
the slope of the budget constraint.
If no market work is done, household income is just the unearned income Y0 as
before. However, in all other circumstances, the household can now earn more
money for the same amount of time, so the budget constraint pivots around Z, from
ZR to ZS. The household can now achieve a higher level of utility.
If it moves from point A to point B, the household increases its supply of labor to
t
t
the market from max – t1 to max – t2 and increases its income from Y1 to Y2.
Figure 5.3(b) shows the supply curve for labor derived from Figure 5.3 (a) in the
same way as the demand curve for a consumption good was derived in Chapter 1,
Section 2.3, Figure 1.7. Note, however, that hours of market labor supplied are
measured in the opposite direction in Figure 5.3(b) from Figure 5.3{a), where they
are measured from right to left. The labor supply curve shows how, other things
being equal, the amount of market work a household will be willing to supply
depends on the wage rate; in this case, as the wage rate rises, the supply of labor to
the market rises too.
As the wage rate rises the supply of market labor increases. The wage rate can be seen
as the opportunity cost of home time, how much income has to be given up for an extra
hour of home time: a rise in the wage rate can be seen as an increase in the opportunity
cost of home time. Alternatively, you can think of an increase in the wage rate as a fall
in the opportunity cost of income, making income 'cheaper' in terms of the time need to
obtain it. As we saw for consumer choice, the actual effect of a change in a price, in this
case a change in the wage rate will depend on the income and substitution effects of
the change. Look back now to Section 3 of Chapter 1 to remind yourself about income
and substitution effects. There you will see that substitution effects always work in one
direction, to shift consumption away from the good whose price has risen towards the
good that has become cheaper. However, income effects for consumer goods may work
in direction, reinforcing, weakening or even countering the substitution effect, depending
on whether a good is normal, weakly inferior or a Giffen good. The household has a
choice between two goods: income and home time. The effect of a rise in the wage rate
is to make income cheaper and home time more expensive.
The substitution effect therefore results in a shift away from the relatively more
expensive good towards the cheaper one, from home time towards income. This is
shown in Figure 5.4 as a move from A to A', where less time is being spent at home and
therefore more on market work, thus bringing in more money income, while keeping the
household on the same indifference curve. A' is the point on the same indifference
curve as A that would be chosen by the household at the new wage rate. A' is therefore
the point where a line parallel to ZS just touches that indifference curve. The movement
from A to A' then gives the substitution effect alone, without considering the income
effect of the change in the wage rate.The other move from A' to B gives the income
effect which results from the increase in the wage rate enabling the household to shift
on to a higher indifference curve, by consuming more of either income or home time. In
the case illustrated in Figure 5.4 more of both are being consumed, but that may not
always be the case. So, although the substitution effect leads to an inevitable increase
in the time spent on market work, the income effect may lead to either an increase in
the time spent at home or an increase in market time. The full effect of the rise in the
wage rate is the combination of these two effects.
If home time is a normal good, the income effect of a rise in the wage rate will
increase time spent at home. So if the hours spent on market work increase
as the wage rate rises, either home time must be an inferior good that is – the
household chooses to spend less time at home as its income increases - or
home time is only weakly normal, so that the substitution effect of a rise in the
wage rate outweighs the income effect. In these circumstances, the labor
supply curve slopes upwards. However, if home time is a normal good, and
the income effect is greater than the substitution effect, the amount of time
spent in the market will decrease as the wage rate rises, leading to a labor
supply curve
with a negatively sloping section as in Figure 5.5(a) and (b)
2.4 Competing uses of time
One of the insights of the New Home Economics was that time not used working in
the market was not just spent on leisure. Both home time and goods purchased on
the market are used as inputs to produce other goods and services, and it is these
other goods and services that produce utility for the household. Becker called such
home-produced goods and services Z-goods. The idea of Z-goods breaks down the
distinction between production and consumption’s-goods cannot be bought; they are
sources of utility which are produced and consumed by the household, using its own
time together with purchased inputs. The same Z-good, and therefore the utility that
the household gets from it can be achieved through different combinations of
purchased goods and time.
3. The division of labor within the household
Becker showed how a household can be better off by specialization – by some
members specializing in market work and other staying at home. He used the notion
of comparative advantage to show how different household members’ Btime should
be allocated to maximize the household’s utility. A person has a comparative
advantage in the production of output x if the opportunity cost of producing a unit x,
in terms of other output foregone, is lower for that person than for other members of
her household.
3.1 The household’s production possibility frontier
The gains from specialization mean that one member of the household should
specialize completely and the other should split their time to get whatever balance
of output is required by the household. We can see this by constructing the
household’s production possibility frontier (PPF), which gives the maximum
combinations of non-market output and income that the household can have given
the two members’ productivities. First we need to look at Max’s and Minnie’s
individual PPFs.
If Max spends all 10 hours doing non-market work, he produces 50 units as we have seen. If he
takes a job for that time he earns £50. These two points are marked on the two axes. Max’s PPF
is the straight line joining these two points, showing all the possible output combinations he can
achieve by splitting his time between the two types of work. The same applies to Minnie’s PPF
as depicted by the figure above figure.
We have drawn the household's PPF in Figure 5.7. To see why it is this shape, we
need to consider what is the most effective way for the household to arrive at
whatever combination of money income and non-market output they require. Let us
suppose first of all that Max and Minnie are only interested in maximizing their
money income. They obviously do this by both working the full 10 hours each in
market work. This gives them £170 in all: Max earns £50 and Minnie earns £120.
They cannot earn more than that and this leaves them no time for non-market work.
This is point A on Figure 5.7. Now consider what it is most efficient for them to do if
they want some non-market output: let's suppose just 10 units to start with. We know
that the opportunity cost of a unit of non-market output for Minnie in £2 in lost
earnings while for Max it is only £1. So Max should be the one to produce the 10
units of non-market work which means he will need to reduce his time doing market
work and so will earn £10 less. This gives point B on the household PPF in Figure
5.7. At this point the opportunity cost of a unit of non-market output for the
household is £1, because this is the income the household has to give up to get one
more unit of non-market output.
If the household wants more non-market output, this process can continue, at
an opportunity cost of £1 per unit of non-market output with Max shifting his
time from market work to non-market work until point C. This is where Max
has shifted his time entirely to non-market work and is producing 50 units of
non-market output, while Minnie is still specializing in market work, earning
£120. If the household wants further non-market output, it will now have to be
Minnie who starts shifting from market to non-market work. But for her the
opportunity cost of an extra unit of nonmarket output is £2 and this is what the
household now has to give up to gain any more non-market output. In the
move from C to D, 10 more units of non-market output require the household
to give up £20 of money income. From here onwards, the household's PPF
becomes steeper, because it has to be Minnie who shifts from market to
nonmarket work, until both partners are just doing non-market work, producing
110 units in total as at E.
On Figure 5.7, anywhere on line AC, Minnie is specializing in market work
completely, while Max is doing a combination of the two types of work.
Anywhere on the line CE, Max is specializing completely in non-market work
and Minnie is doing a combination of the two types of work. Which particular
point on their joint PPF represents the work they do depends on the output
mix the household chooses, which will depend on its preferences. However, at
any point on the production possibility frontier, one or other is specializing
completely: either Minnie is specializing in market work, in which she has a
comparative advantage, or Max is specializing in non-market work, in which
he has a comparative advantage. Since the points on the production
possibility frontier are the points of maximum efficiency, this supports the point
made earlier that there are benefits to the household from specialization.
3.2 Explaining comparative advantage.
New Household Economics does not rely on biological explanations alone to
explain why women have a comparative advantage in non-market work and
men in market work. The concept of human capital is used to explain how
small biological differences can make an enormous difference to who does
what. Human capital concept comprises any characteristic of a person which
takes time or money to acquire and can increase their productivity later.
Unlike physical capital, human capital is embodied in a particular person and
cannot be transferred to someone else. The skills used in market work are
different from those used in non-market work, so people need to make an
investment in different kinds of human capital for each. New Household
Economics resorts to the biological difference between men and women in
childbearing. Even if the extra time women devote to non-market work
because of childbearing is small, it is enough to explain differences in human
capital investment and thus differences in comparative advantage and
consequent specialization. Once men and women grow up expecting to find
gender differences in comparative advantage, it makes sense to acquire the
human capital that one's future partner is most likely to lack. If women invest
less in market-based human capital, the jobs that will be open to them will be
less skilled and less well paid than those their male partners can get, and it
will make sense for the man to do more of the household's market work.
Men's market-based human capital will thus accumulate further through
increased work experience. This will further reduce the comparative earning
potential of women, who spend more time in the home, making it more likely
that it is women who disrupt their market work later if this is needed - to care
for elderly relatives, for example. Since women anticipate shorter, more
disrupted periods of market work, they will invest less throughout their lives in
training for the market and gain less work experience than men. Thus, very
small initial differences in comparative advantage can be magnified by
differences in investment in human capital to explain and reinforce gender
specialization within households.
3.3 Explaining increasing female participation rates.
How does the above analysis help us explain the increased female
participation rate of women in market work? NHEwould break this question
down into two sub-questions:
1. How can the increasing number of total hours put into market work by
households be explained?
2. How can the increasing proportion of market work done by women be
explained?
The NHE would answer the first question by pointing to either a shift in the
productivity of market versus non-market work in producing the same Z-goods,
or to a change in the Z-goods that households wish to consume towards those Zgoods that are more market-work intensive (i.e. require more income and less
home time). The answer for the second question would be that if men are already
specializing entirely in market work, then if the household moves towards a
greater reliance on market work, it can only be women who shift the proportion of
time they spend in that direction.
Figure 5.8 shows how the economic activity rates of women increased in the UK
from 1973-92, where economically active means either doing market work or
being registered as looking for it. Notice that the existence of children under 10
and the age of the youngest child has a consistent effect on whether women
engage in market work. Women with children under 10, and particularly women
with pre-school children, are more likely to specialize entirely in non-market work.
The NHE would explain this in terms of the Z-goods that children require
being particularly home-time intensive, so that many households with young
children require at least the equivalent of one person's full-time nonmarket
work. In these circumstances, it is more efficient for at least one member to
specialize in non-market work. Because of their comparative advantage,
women - rather than their husbands, if they have them - will do the nonmarket
work.
The evidence of relative wage rates from Figure 5.9 supports this conclusion;
if women earn less than men they will have a comparative advantage in doing
non-market work, quite apart from any greater skills they may have acquired
in that area
4. The institutional economics of the household.
What light an interdisciplinary institutionalist approach can throw on household
behavior? This approach regards the preferences, resource endowments and
technology of the household as endogenous to, or formed within, the socioeconomic
system. So, too, are the social relationships among, and the motivations of,
individual household members. The implication is that household behavior is more
varied, and more complex, than it is in the NHE model. Institutional economists of
this school recognize that the forms of social relationships matter and theorize richer
forms of motivation than the utility-maximizing rational choice framework of the
neoclassical approach. This makes the institutionalist approach particularly suited to
analyze the hybrid nature of the small, family firm in which family relationships and
the need to make a profit are intertwined.
4.1 The institutional context of household production.
The NHE model takes social, cultural and political factors to be incorporated in
a household utility function which is exogenously determined, and such
factors are therefore not explained within the model. Institutionalists start from
a view of households as embedded in a greater social whole. Their research
agenda is to investigate how those social cultural and political contexts shape
the preferences, opportunities and constraints that face individuals within their
social groups and networks. Households survive on the basis of inputs from a
range of sources in both the monetary formal sector of the economy and what
we can call the non-monetary complementary economy. The formal monetary
sector of the economy comprises all market transactions and those involving
the state, the complementary sector of the economy comprise all other types
of economic interaction, including the performance and consumption of unpaid
labor, and the reciprocal exchange of labor and gifts. The NHE model invokes
the neoclassical assumption that economic agents are rational and selfinterested. The institutionalist approach emphasizes a much greater
complexity of motivations and organization to achieve household goals. The
motivation for economic activity, in both formal and complementary sectors, is
recognized as variable and influenced by the cultural and moral climate.
Further,institutionalists do not expect a single model of behavior, such as the
utility-maximizing model, to apply across all societies. In sum, the
institutionalist approach regards the norms that affect behavior as being a part
of the subject of study, not exogenous to their concerns.
4.2 An institutional model of household rationality.
One of the main differences between the NHE and the institutionalist
approach to the economics of the household concerns underlying
assumptions about the forms of rationality governing economic behavior.
Institutionalists tend to find a lack of depth in the neoclassical conception of
rationality, when applied to non-profit-seeking institutions. The model behind
the neoclassical model of rational choice assumes that indifference curves
can be drawn connecting the infinite number of combinations of goods which
will yield the same level of utility, representing the infinity of substitutions that
will bring about the same level of satisfaction. It assumes that any choice
between two alternatives can be modeled in this way. However,
institutionalists point out that many of the choices which households actually
face are not always amenable to this treatment. According to institutionalists,
the unwarranted assumption of endless substitution possibilities between any
two goods simply reflects the presupposition of monetary calculation that
everything has a price. Institutionalists criticize the neoclassical model of
rational choice as purely formal, in that it is applied in the same way
irrespective of the nature of the choices involved, and does not take account
of differences in the institutional settings within which such choices are made.
One of the founders of modern sociology, Max Weber,drew the distinction
between formal rationality and substantive rationality in economic action. He
called a system of economic activity 'formally rational' according to the degree
in which the provision for needs is capable of being expressed in numerical,
calculable terms'. He contrasted this with substantive rationality, by which he
meant 'the degree to which the provisioning of given groups of persons with
goods is shaped by economically oriented social action under some criterion
of ultimate values'.
Neoclassical theory recognizes only formal rationality in that it considers only
how the best way of meeting given ends can be calculated, not how those
ends are formed, nor how some ends may preclude the calculated weighing
up of alternatives that formal rationality requires. An institutionalist approach,
however, recognizes that people are motivated by substantive forms of
rationality too, which may make certain values override the calculation of
interests, and considers how those substantive ends are determined. The
monetary calculations to maximize profit carried out by firms are the purest
examples of formal rationality. The New Household Economics assumes that
the same sort of rationality applies within the household. Institutionalist
approaches recognize that households are not the same sorts of institutions
as firms and therefore that the actions of household members cannot be
assumed to follow from the same sort of rationality that governs the conduct of
actors in a firm
5. Where next?
We found that at most we gain an ambiguous understanding of the real world
of the household from the NHE model.Although the changes that the post-war
era has brought to women's relationship to the household economy can be
explained, the model does not take account of how those very changes have
disrupted household utility functions. Insofar as economic life is embedded in
social and cultural relations, changing values need to be incorporated into the
understanding of women's participation in the labor market. This means that it
may be adequate to use the New Household Economics model as a startingpoint, but, in order to incorporate an understanding of the changes that
structure people's values and motivations, we need to move to a research
agenda based on an institutional perspective. The predictive worth of the NHE
model remains limited because of the central role played by the unobservable
variables incorporated in its assumptions: the values and institutional factors
that underlie and determine substantive rationality.