Economics of Gender Chapter 5 Assist.Prof.Dr.Meltem INCE YENILMEZ

Economic Tools and Economic Thinking Microeconomic Approach A. Constrained optimization B. Comparative statics Functions A. Utility function B. Household production function Total and Marginal Functions Supply & Demand Empirical Methods A. Regression analysis B. Natural experiments

Microeconomics Choices: – Individuals are rational utility maximizers – Constrained by budget and time (constrained maximization) – Decisions made on the margin Variables: – Endogenous (dependent or choice variable) – Exogenous (independent or explanatory variables) Theory: – Posits relationship between dependent variable and independent variable(s). Functional form: X* = F(Z). Best choice (solution): x*

Comparative Statics Assume: X* = F(Z). Theory:  X*/  Z  0. If Z , this causes  X*. Microeconomics: – Economic actors choose endogenous variables to maximize something. – Best choice: satisfies above total condition and a marginal condition. – Theory predicts how best choice changes when exogenous variables change. – Predictions: comparative static results; use to assess theory.

Functions Functions: A convenient way to show what depends on what. – Demand function can be written as Q = f(P) Utility function: – U = U(X, Y) where X & Y are two goods; – Ordinal utility versus cardinal utility – Utility theory a theory of rational choice Household production function: – G = G(T, Z). – G: amount of HH goods produced. – T: first input: time. – Z: amount of all other inputs. – Similar to a firm’s production function: Q = Q(K.L).

Supply and Demand Analysis Law of Demand – Q d = F(P; other P; Y; Preferences) – Negative slope. Law of Supply – Q s = F(P; input prices; technology) – Positive slope. Equilibrium – Occurs naturally – Excess supply – Excess demand

Comparative Statics of Supply and Demand Change in ceteris paribus factor – Shift demand curve Tastes, preferences, income, prices of substitutes and complements, changes in population – Shift supply curve Prices of inputs, weather, technology, number of firms

Empirical Methods: Regression Regression Analysis: A statistical technique for estimating relationship between two or more variables – One dependent variable and one or more independent variables – Example: Prediction from a demand function – Write as regression equation: – Q d =  +  P +   Q d /  P =  ; (1/  is slope of D curve)  is value of Q d when P = 0; (intercept)  is random error term

Marriage and the Family—An Economic Approach Why look at marriage first? – Different impact for women:  identity; like occupation. – Important economic institution: Major determinant of income distribution – Marriage as “economics as choice:” even if key determinant is love – Nobel Prize Winner Gary Becker: The family can be viewed as a miniature factory making both consumption and investment decisions.

Overview of Marriage and Family Structure Changing family structure over time: – Single parenthood – Rising divorce rates – Rising rates of re-marriage – Same sex unions

Family Structure Biggest change in family structure occurring among households with children – 1960: over 90% kids in 2-parent households. – 2006: about 71% kids in 2-parent households. Definitions: – Family Household: 2+ persons sharing household that are related by marriage, blood, adoption. – Non-family Household: 1+ unrelated (like college students living together). – Householder: single adult, heading a household

How can Economics be Used to Explain Marriage? Must be variation in marriage and divorce so that we have something to explain with our theory Must be benefits to marriage (and divorce) Must be costs involved (transaction costs and foregone costs) Individuals must act rationally

Risks of Specialization Life-cycle changes: advantage changes as individual ages (kids grow up), etc. Specialization   divorce Women who specialize and then re-enter the paid workforce find earnings potential has fallen. This is risky given high probability of divorce. – Reduces incentives to specialize. – Both occur simultaneously:  divorce   specialization;  specialization   divorce.

An Example of Specialization and Exchange Two activities: – Paid work (w) – Home work (H) Two people: Mr. M and Ms. F Each has own “prices” that show productivity in each activity (or, value of time in each activity). w = value of paid work. H = value of home work Interpretation of w and H: w = what earn per hour in market; H = value of home cooked meal prepared in an hour.

Economies of Scale Essentially: It costs less per person if two people live together: This lowers the per-person (average) housing cost, food cost, etc. Average cost  as # persons . So, need one refrigerator whether one person or 5 people live in a house. Example: Official poverty threshold incorporates this idea: – Threshold for 2 people is NOT twice the threshold for one person.

A Supply & Demand Model of Marriage Uses Becker Model: Productivity as a proxy for utility. – How marital status choice is made – How gains of trade are divided between a husband and wife Need basics (M = male; F = female): – Output: For single person: Z M and Z F For married-couple HH: Z MF – Share of Output: Amount of Z MF to husband = S M Amount of Z MF to wife = S F

Details on the Marriage Market NOT assuming that S M = S F Note: S M + S F = Z MF Marriage “rule”: – Marry if expect to be better off: – Male: marry if S M  Z M – Female: marry if S F  Z F Implies that for a married couple: – S M + S F  Z M + Z F – So: Z MF  Z M + Z F – Gains to marriage exist for most individuals.

The Effects of Changes in Supply & Demand Three examples: 1) Change in sex ratio 2) Women’s improved labor market opportunities 3) Effect of birth control, etc. Change in sex ratio: – Differences by age, race and education – Effect of a  in sex ratio:  # women with no  # men Shift parallel part to the right See  slope (same %  in #women ; smaller #  at low S F ; larger #  at high S F ).

Other Changes in Supply & Demand Increase in women’s wages: – Will  Z F (well-being while single) – Shifts S upward: Each woman now willing to marry at a higher value of S F than before. No change in the vertical point More effective birth control: –  Z F and  Z M start with S 2 and D 2 AIDS: start with S 1 and D 1