Some Preliminary Considerations about Labor Supply Decisions of Families

The extension of analyis on labor supply decision from an individual to a family has some theoretical problems that are briefly discussed in the following subsections before we proceed to the main topic of this chapter.

1 Other examples are Tokle and Huffman (1991) , Kimhi (1994) and Kimhi and Lee (1996).

2 Kimhi and Lee (1996) take somewhat different approach, using the conditional demand concept on the theoretical level and simultaneous tobit equation system for estimation. Although their approach is not directly discussed here, it can be mentioned that it has a problem similar to the one to be discussed in this chapter.

6.2.1 Decision Mechanism

In the production theory (or neoclassical firm theory) or the consumer theory, the extension of the dimensions of input ,output, or consumption space requires no reconsideration of the economic objective of the subject, i.e. profit maximization or utility maximization, respectively. In contrast, the extension of the analysis on labor supply to a multi-person household entails the question of how to model the way the economic decisions of its members are made. According to the typology of Lundberg (1988), there are three groups of models;

‘traditional family’ model, joint utility model, and bargaining models.

‘Traditional Family’ model treats the labor decision of one person (usually the husband) separately from attributes and decisions of the other members ( for example, the wife). The decisions of one person are treated as exogenous to the decisions of the other members. This approach is typically chosen in empirical studies on the female labor decision or dynamic economic supply mainly because it helps to simplify analyses which are ‘complicated enough’

by the theoretical or methodological aspects in interest ³ .

Joint utility approach assumes a utility function, which is to be maximized by the household. This utility function is assumed to have attributes and economic behaviors of the members as separate arguments and to have the usual properties of the utility functions from the individual consumer theory. It has been pointed out and criticized that this aggregation approach, from a theoretical point of view, can be justified only under restrictive assumptions⁴. Some studies, which have carried out formal tests on some predictions of the joint utility model, rejected these predictions ⁵. However, due to the advantage that well-known theoretical results from one-person utility maximization model can be readily applied, joint utility approach serves as the main theoretical framework for the empirical studies on off-farm labor supply in multiple-person agricultural households.

The studies based on the bargaining model, for example McElroy and Horney(1981) and Browning et al (1994) , conceptualize the resource allocation of the family members as a game theoretical situation. It has theoretical appeal, especially if it is believed that “individuals, not

3 For example Eckstein and Wolpin (1989) on the dynamic analysis on female labor participation.

4 Samuelson (1956) and Becker (1981) explicitly show examples of assumptions under which the joint utility approach can be theoretically justified. In the work of Samuelson it is the existence of consensus on the ‘ethical worth’ of welfare of the members. In the work of Becker it is the existence of a member (‘family head’) who cares about welfare of the other members and, therefore, transfers general purchasing power to other members.

5 See Lundberg (1988) and the works cited in Browning, Bourguignon, Chiappori and Lechene (1994)

household, are the basic decision units“ ⁶ The bargaining model has, however, at least two problems. First, there seems to be no standard way to formalize the structure of the ‘game’ of the intrahousehold resource allocation. As it is widely known, the prediction from a game theoretical model is strongly influenced by the structure of the game, which might be termed as

‘institution’. A specific game theoretical modeling of the institution - for example McElroy and Horney (1981) assumes a certain form of ‘utility gain production function’, which is assumed to be maximized by the married couple - can be subject to controversies as much as the joint utility model.⁷ Second, the bargaining model approach often requires much more detailed data than are normally available⁸ for the empirical implementation.

This chapter employs the joint utility model because it aims to improve the interpretation of this model, which can be still considered to be a useful framework in many empirical researches.

6.2.2 Family Size and Structure

A ‘nuclear family’, i.e. married couple with small number of children that are teenagers or younger, is the dominating image of family or household in economic or social discussions in the developed countries. However, families in reality show a wide spectrum in size and demographic structure. The spectrum can be thought to be wider among farm families because farm familes are, on average, larger in size than the nuclear family ⁹ and often have more than two generations ¹⁰. Differences in size and demographic structure might lead to differences in decision framework which cannot be captured by mere increase in variables or in the number of arguments in utility functions and restrictions¹¹. However, we restrict our discussion to the husband-wife model because this model is the simplest form for the discussion on the

6 Browning, Bourguignon, Chiappori, and Lechene (1994)

7 Chiappori (1988) and Chiappori (1992) are examples of the effort to build a model which is general enough to overcome this problem.

8 For example, the observability of expense on goods with some special characters in Browning et al (1994)

9 For example, the average family size in the VW data used for our estimation was 5.4 and 4.5 person in LEM and WMK, respectively, whereas it was, according to the census in 1987, 3.3 and 2.5 for all the households in each region. Schulz-Greve (1994), p.77

10 For example, about half of the surveyed households in the VW data have 3 or more generations, whereas only 1.3 % of the whole households in Germany have so many generations. See Schulz-Greve (1994) p.79 - 80

11 For example, Lundberg (1988) reports considerable differences in labor supply pattern of married couples according to the numbers of young children.

intrahousehold interdependence and because the families with married couple are majority in the data set to be used in the empirical section. ¹²

6.3 Joint Utility Model and the Problems of Individual Reservation Wage Approach