Children, time allocation, and consumption insurance

Richard Blundell, Luigi Pistaferri, Itay Saporta Eksten 18 December 2017

a

A

Many tax policies in the US and other countries are designed to incentivise female labour force participation. Many economic models, however, emphasise that the response of women to tax incentives depend, among other things, on the presence of other earners in the household (i.e. a husband) and on the presence of children, especially those of pre-school age. These issues were originally raised in a number of important studies on the optimal allocation of goods and time over the life cycle (Becker 1965, Ghez and Becker 1975). One conclusion of that research was that children change the optimal allocation of parents' time to work in the paid labour market, leisure, and childcare time. Responses to wage and income changes differ across households depending on the importance of ‘child services’ in the utility function of the parents.

In an environment with uncertainty, the allocation of goods and time over the lifecycle also has the goal of helping households insure their living standards against shocks to wages or employment. For example, the secondary earner may enter the labour market (or work longer hours) when the primary earner loses their job or faces a wage cut. However, since an increase in hours of work reduces the amount of time that can be allocated to the production of childcare services, it is clear that there are important trade-offs between producing childcare services and insuring consumption against shocks. Our recent work combines the importance of children in shaping household preferences and the demand for insurance in a unified framework (Blundell et al. 2017).

Modelling houshold decisions

In our research, we model married couples’ decisions on how much to consume or save and how to allocate their available time to three activities: work, leisure, and the care of children (if present). Husband and wife choose time to devote to children as inputs of a home production function for childcare. Our framework is general in the sense that we fully account for borrowing constraints and extensive margin decisions on time use (i.e. whether to work or not) – both of which are likely extremely important for younger households with children.

A correlation between the hours of work of the husband and the hours of work of the wife (as well as the relationship between their hours and the spending on goods) can be generated by at least two mechanisms. The first is home production. For example, parents may combine their time and various goods (toys, books, etc.) to produce childcare ‘commodities’ or services. In this case, we might expect time inputs of the two parents to be substitutes (if, for example, one of the two parents specialises in paid market work and the other specialises in taking care of the children). This may be particularly relevant in the presence of multiple children or children of different ages. The second mechanism is the possibility that spouses may enjoy their leisure time more when they are together (as we found in our previous work, Blundell et al. 2016). Indeed, it is very likely that the complementarity of time together provides a key incentive for relationships to form in the first place. Besides these two mechanisms, a correlation between the hours of husband and wife may come from joint progressive taxation of earnings (as is the case in the US) or correlation of wage shocks in the labour market.

In the absence of time-use data, it is hard to verify whether covariation in the hours of work of husband and wife descends from explicit non-separability in utility or from the effect of home production (or other mechanisms). We use micro data from three sources – the Panel Study of Income Dynamics (PSID), the American Time Use Survey (ATUS), and the Consumer Expenditure Survey (CEX) – to address these questions. Our estimates can be used to provide a comprehensive picture of the ability of households to smooth consumption in response to shocks. In addition, information on hours of work and hours spent on childcare allows us to disentangle the potential degree of complementarity between husband's and wife's leisure (demand for ‘companionship’ or ‘love’) from that reflecting the degree of substitutability of their childcare time in the production of childcare services. We find that this decomposition is important. In particular, the hours of work of young mothers appear to respond little to an increase in the male's temporary wage (which induces an increase in his hours) because the force that pushes her to reduce her leisure time (or work longer) due to the lower leisure time of her companion (complementarity of leisure) is more than counteracted by the force that pushes her to increase childcare time because the husband is now allocating fewer hours to child-raising, and her time is a substitute for his time in the household production of childcare services. Similarly, own (especially female) wage responses are large because they include both an intertemporal substitution component (people work longer when wages are temporarily higher) and a home production component (when wages are temporarily higher, the opportunity cost of an extra hour of leisure and/or an extra hour of childcare increases). Ignoring the interaction between children and time use when modelling family labour supply thus misses important components of the adjustments in consumption and time use that families undertake in response to shocks to their resources.

Responses to policies targetting households with young children

We use our model to simulate behaviour in response to new policies. In particular, we compare two revenue-neutral policies that have direct effects on the welfare of households with children. In one case, we provide households with young children with an unconditional monetary subsidy. In another, we compensate households with young children for the child-related fixed costs of work they face. We find that both policies relieve households, in the pre-children period, from saving in anticipation of the decline in family earnings induced by the secondary earner – which in most US households coincides with the woman – reallocating time from work to childcare when children arrive. We also find that the unconditional subsidy policy has greater welfare value than the policy that compensates for the fixed costs of work. This is partly due to the ‘no strings attached’ nature of the first policy, and partly because of the dynamics induced by credit market frictions.

Our results suggest that, although some of the female labour supply responses are derived from an adjustment in leisure hours, there is a large response in the time she spends with her children (especially in response to an adverse permanent shock to the husband's wage). The estimates suggest that this is not compensated by an equivalent increase in the time that the husband spends with the child. One important question for future work is to evaluate the resulting impact on the child’s well-being and human capital accumulation. In general, our results suggest that the reduction of the mother's childcare time should be an important part of any analysis of the consequences of policies or external shocks that incentivise mothers with young children into work.

References

Becker, G S (1965), "A Theory of the Allocation of Time", The Economic Journal 75(299): 493-517

Blundell, R, L Pistaferri and I Saporta-Eksten (2017), "Children, Time Allocation and Consumption Insurance".

Blundell, R, L Pistaferri and I Saporta-Eksten (2016), "Consumption Inequality and Family Labor Supply", American Economic Review 106(2): 387-435.

Ghez, G, and G S Becker (1975), The allocation of time and goods over the life cycle, Cambridge, MA: NBER.

a

A

Topics:  Gender Labour markets

Tags:  children, mothers, saving, female labour force participation

David Ricardo Chair of Political Economy, University College London

Associate Professor of Economics at Stanford University

Assistant Professor in Economics, Tel Aviv University

Events

CEPR Policy Research