Presentation on theme: "Chapter 7: Household Production, the Family and the Life-Cycle"— Presentation transcript:
1 Chapter 7: Household Production, the Family and the Life-Cycle Household production and labor supplyJoint labor supply decisionsFactors influencing retirement
2 Household productionSame as income vs leisure, except “leisure” can be used for household productionHousehold production can be cooking, cleaning, taking care of children, “leisure”, or anything that generates utilityBudget line is now a trade-off between “market goods” (income) and “home production”.
3 Household production When wage rate rises Income effect: purchase more home-production (work less)Substitution effect:Purchase less home production (work more)Adjust home production to more “goods intensive” and less “time intensive”Eat out more often & more processed foods (rising obesity?)More home technologyMore help hired for home production (cleaners, gardeners, daycare,…)Reduce quantity and increase “quality” of kidsIncreased ability to substitute market goods for time will flatten indifference curves – increase work hours.
4 Joint labor supply decisions In a married household, if couple decides one will stay home to take care of children, what determines outcome?Relative wagesRelative utility/ability in providing childcareAs womens wages rise relative to men’s, predicted effect onWho stays home with children?Division of time in home production?
5 Joint labor supply decisions During a recession, wage offers fall.Offsetting effects on LFPDiscouraged worker effectAdded worker effectEvidence is that discouraged worker effect dominates and LFP drops during recessionsAdded worker effect has been shrinking due toIncreased UI generosityMore married women working
7 Choice of retirement age Steepness of I-curvereflects willingness to postpone retirement for additional income.Steepness of budget constraint determined byearnings profileSocial Security formulapension plan featuresWealth and substitution effects from change in budget constratint.
8 Choice of retirement age If the financial rewards to postponing retirement beyond age 62 are increased, the person is faced with a wealth and substitution effect.Wealth effect: Holding retirement age constant, the person has greater wealth and will retire sooner.Substitution Effect: Holding wealth constant, the reward to postponing retirement has increased .. substitute money for years in retirement.Net effect: Ambiguous.
9 Choice of retirement age Effect of increasing rewards to postponed retirementsubst efffect > Wealth effectWealth effect > subst efffectR*
10 Choice of retirement age How do each of the following affect retirement age?steepness of earnings profile?Social Security formulaeCalculating AIME & PIAreductions for early retirementcredits for postponed retirement.
11 Choice of retirement age Private pensionsDefined benefit planlife annuity promised at retirement.annuity payment generally tied to years of service, final salary, and a "generosity factor".PV of defined benefit plan may eventually fall with retirement age (fewer years to collect annuity versus increase in size of annuity).“Actuarially fair” adjustment for postponing retirement by one year keeps PV of pension independent of retirement age.If life expectancy is 80, what is actuarially fair adjustment for a worker who can collect an annuity of $50,000 annually at age 65, assuming interest rate=0? If interest rate>0?
12 Choice of retirement age Private pensionsDefined Contribution Plan.a savings account that the worker may receive as a lump sum at retirement.PV of defined contribution plan grows with retirement age because contributions are added over time.Over time, there has been a switch from defined benefit to defined contribution plans.What's the effect of switching from DB to DC plans on retirement incentives?