1. Chapter 7: Household Production, the Family and the Life-Cycle
Household production and labor supply
Joint labor supply decisions
Factors influencing retirement

2. Household production
Same as income vs leisure, except “leisure” can be used for household production
Household production can be cooking, cleaning, taking care of children, “leisure”, or anything that generates utility
Budget 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 technology
More help hired for home production (cleaners, gardeners, daycare,…)
Reduce quantity and increase “quality” of kids
Increased 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 wages
Relative utility/ability in providing childcare
As womens wages rise relative to men’s, predicted effect on
Who stays home with children?
Division of time in home production?

5. Joint labor supply decisions
During a recession, wage offers fall.
Offsetting effects on LFP
Discouraged worker effect
Added worker effect
Evidence is that discouraged worker effect dominates and LFP drops during recessions
Added worker effect has been shrinking due to
Increased UI generosity
More married women working

6. Choice of retirement age

7. Choice of retirement age
Steepness of I-curve
reflects willingness to postpone retirement for additional income.
Steepness of budget constraint determined by
earnings profile
Social Security formula
pension plan features
Wealth 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 retirement
subst efffect > Wealth effect
Wealth effect > subst efffect R*

10. Choice of retirement age
How do each of the following affect retirement age?
steepness of earnings profile?
Social Security formulae
Calculating AIME & PIA
reductions for early retirement
credits for postponed retirement.

11. Choice of retirement age
Private pensions
Defined benefit plan
life 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 pensions
Defined 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?