Macroeconomic Implications of Intra-Household Decisions (MIIHD)
MIIHD is the newly established DFG research unit on “Macroeconomic Implications of Intra-Household Decisions” at the Faculty of Economics and Business composed of a core group of six researchers: Georg Dürnecker, Nicola Fuchs-Schündeln, Zainab Iftikhar, Leo Kaas (deputy), Chiara Lacava and Alexander Ludwig (spokesperson). Our main research goal is to enrich our understanding of intra-household decisions for macroeconomic outcomes, and how those and government policy interventions through tax and transfer programs in turn affect intra-household decisions such as household formation, labor supply, savings and fertility decisions. Our research will build on sound microeconometric data analysis and theoretical models to develop quantitative structural models with heterogeneous populations to address the three-way feedback between intra-household decisions, policy and the macroeconomy with a specific emphasis on inequality, both within and across households.
Project 1: Home Production and Structural Transformation
The point of departure of project P1 (by GD) is the well-established fact that economies undergo large-scale sectoral reallocations of employment, value added and expenditures as they develop across the broad sectors agriculture, manufacturing and services. This process is commonly referred to as structural transformation. This project aims at investigating the role of home production for this process. Home production may play an important — and so far overlooked — quantitative role for the structural transformation because it constitutes a sizable economic activity in terms of hours worked and value added in most industrialized economies. Rising female wages and increasing educational attainment of women during the last decades have increased the opportunity costs of women to engage in home production. This has led to an adjustment of the intra-household allocation of household production tasks towards men and induced women to enter the labor force. As females have a comparative advantage over men in working in the service sector, the increase in female labor force participation has further stimulated the expansion of the service sector. The goal of this project is to understand which part of the observed structural transformation towards services is driven by home production. Since the induced structural transformation impacts on the allocation of all production factors of the economy, this project analyzes how labor, capital and aggregate productivity are influenced in the process of economic development.
Project 2: Behind Every Successful Man There is a Woman: The Effects of Within-Household Specialization on Male and Female Careers
Related to the role of home production, project P2 (by NFS) looks at the career choices of partners in a household by emphasizing the role of specialization within households on labor market outcomes of the primary breadwinner. While the aforementioned processes of structural transformation and increasing educational attainment of females are at work, it is still very rare that couples participate equally in household chores, or that women earn more than their husbands. The reason might be intra-household specialization and the sources for this specialization are manifold, stemming from institutional incentives such as joint taxation of married couples to gender norms. The goal of this project is to analyze the consequences of the observed gendered behavior in two ways: First, it aims to quantify the causal effect of wives specializing on household chores on the career success of the husband. Second, it evaluates the implications of this behavior for the gender wage gap, taking into account that women compete in the labor market with married men who may themselves be supported by a partner doing the lion-share of the household work.
Project 3: The Child Penalty in the Labor Market: Working Hours and Joint Career Choices
Despite the observed increased participation of qualified females in the labor market and the overall reduction of their time used for home production, the gender pay gap remains substantial in all developed countries. Project P3 (by LK and CL) notes that the gender pay gap worsens when workers need to reduce temporarily their working hours, e.g. for childcare, and then face frictions in switching back to a full-time work schedule after children have grown older, a phenomenon referred to as the part-time trap. To deal with this, some countries have passed legislation giving workers the right to flexibly change from full-time to part-time schedules and vice versa. It is important to understand how more flexible work arrangements affect the labor market choices of individuals and couples. The main goal of this project is to evaluate the consequences of such work-time flexibility policies, taking the responses of firms’ labor demand and worker-firm matching outcomes into account. To this aim, the project will develop a quantitative joint household search equilibrium model with alternative institutional set-ups in temporal flexibility in order to assess how these policies affect male and female life-cycle labor market patterns before and after child-birth events.
Project 4: Aggregate Effects of the Egg-Freezing Technology and Policy Implications
Closely related, project P4 (by AL) asks how new fertility technologies, so-called assisted reproductive techniques (ARTs), which are increasingly becoming standard elements of fertility decisions, affect career choices, human capital accumulation decisions and the gender wage gap. ARTs circumvent the infertility constraints generated by delayed childbearing or biological characteristics of a couple. This raises incentives and better enables females to acquire skills before and during their labor market participation by postponing childbearing. It also affects the career choice decision in regard of the choice of which firm to work for. This, in turn, incentivizes firms to provide employment contracts that allow highly qualified females to combine family and work, potentially even offering compensation of the costs for ARTs as part of the employment contract. The project specifically looks at egg freezing as an insurance device for late life child
bearing, which is particularly attractive for career-oriented women. Against the background that firms increasingly offer egg freezing as a wage perk, the main objective is to characterize the optimal labor contract in an environment where the preference for early / late child birth is private information and where females over their life-cycle make decisions jointly with their partners on careers, labor supply, fertility and household saving. The model will also be used to evaluate alternative government policies such as subsidies of ARTs (as observed in Denmark) or policies to reduce earnings risks, which influence fertility choices.
Project 5: Families, Housing Decisions and Housing Policies
The living arrangement of households and the division of work in households does not only affect career choices and labor market outcomes, but also consumption and saving decisions, in particular the decision whether or not to buy a house and what size or quality of a house to occupy as an owner or renter. Project P5 (by LK and AL) specifically focuses on the role of housing as an important component of a household’s consumption and wealth. Housing decisions are made jointly within households and, in addition to aggregate factors such as house prices, interest rates and the policy environment, depend on various family-specific variables such as the marital status, the number and ages of children, and the labor market prospects of adult household members. The goal of this project is to develop a structural model of the housing market to analyze how households’ decisions on housing consumption and ownership depend on the family status if the latter varies over the life-cycle. In particular, we aim at addressing how the housing market amplifies existing inequalities across families. For instance, asset and income rich households may be able to afford a house while asset and income poor households may be caught in a rent trap, i.e. with high rental expenditures they can no longer afford to save enough to one day finance the downpayment of a house. The model will further shed light on the driving forces of intergenerational wealth persistence working through the housing market and it will be used to evaluate how housing policies targeted towards families affect homeownership patterns and thus intra- and intergenerational inequality.
Project 6: Assortative Mating, Inequality and Social Mobility: The Education Channel
Inequality and intergenerational persistence are also at the center of project P6 (by NFS and AL) which extends the focus from inequalities and persistence in wealth to also encompass human capital and thus educational and income inequalities within and across generations. Point of departure of the project are two observations. First, in addition to the expansion of higher education in particular of females, also the assortativeness of mating along the educational dimension has increased over the last decades in many advanced economies. Second, better educated parents invest more into the education of their children through both money and time. Thus, increased educational assortative mating potentially has an important impact on intergenerational mobility. It facilitates educational investments and monetary transfers towards children of parents with high education, income or wealth, and it additionally affects the incentives of parents to invest into the human capital of their children based on the expected mating patterns of the next generation. An additional amplifier are wealth returns, which according to a recent literature are increasing in skills and wealth. This adds an additional motive for parents to transfer resources to their children through investments into human capital and wealth. The project aims at quantifying these channels as contributors to the evolution of inequality and intergenerational persistence between 1960 and today in the U.S. economy, taking observed mating processes by education of parents as given. As an extension, this project will predict inequality and intergenerational persistence into the future in a model where assortative mating is an endogenous outcome of explicitly modeled mating on a marriage market and where a skill biased technological change process is the exogenous driving force of the dynamics of the economy.
Project 7: Rotten Relationships and the Macroeconomy: The Effects of Parental Separation on Labor Market Outcomes, Inequality and Aggregate Productivity
Closely related, project P7 (by GD and ZI) puts an emphasis on younger generations by focusing on the role of parental separation and single parenting for the economic well-being of children. Parental separation and single parenting are important phenomena in developed countries. Research in psychology, sociology, and economics consistently finds that parental separation has substantial adverse and potentially long-lasting effects on the child’s development of cognitive and non-cognitive skills. According to this literature, a family break-up generally implies a drop in household income, a reduction in the parental time and monetary investment in the child’s human capital, and the exposure of the child to severe emotional stress. The objective of this project is to develop a structural model akin to the one of project P6 to explore the implications of parental separation on child outcomes and macroeconomic outcomes such as income and wealth inequality. Particular emphasis will be given to the role of divorce and children from divorced households. The project aims at disentangling the relative importance of endogenous parental decisions through money and time investments into children from the effects of emotional stress. Finally, the model will be used to evaluate the role of family policies, which may (partially) offset the potential negative effects that parental decisions may impose on their children.
Project 8: Different Union, Different Rules: Implications for Consumption, Labor Supply, Fertility and Welfare of Household Members
The previous projects analyze how economic forces affect joint household decisions on labor supply, saving and human capital formation without distinguishing between married and cohabitating couples. Project P8 (by ZI) starts with the observation that marriage (and divorce) rates have been decreasing in many developed countries over the past decades while cohabitation rates have been increasing. Furthermore, female (and male) labor supply as well as consumption decisions might be very different for cohabitating and married individuals. The reason is that the two forms of union are subject to different commitments, outside options and financial and legal constraints, which lead to differences in the bargaining power of women in the intra-household decision process. The main goal of this project is therefore to investigate whether there are significant differences in the distribution of bargaining power between cohabitating and married partners and how these differences affect the labor supply, fertility, education and consumption decisions of households as well as child poverty in terms of consumption, and hence the welfare of partners and their children. Similar to project P7, this project emphasizes the role of the union for child outcomes, here with an emphasis on comparing cohabiting with married couples.