Potential Wage Research Articles

The impact of family structure on time use and potential wage in Switzerland

Using the data of the Swiss Labour Force Survey for 1995, this paper examines the interrelations between family situation, time use and potential wage with descriptive regression equations. The resulting estimated coefficients are used to stimulate stylised biographies which illustrate the large gender‐specific differences in the impact of the family situation. With the help of these simulations, the economic consequences of family/work decisions can be concentrated in opportunity costs over the whole active life. Compared with a single woman, a married woman with two children suffers a total loss of labour market income of about 1.9 million francs. The comparison with similar studies for other countries suggests that the consequences of family decisions for women in Switzerland are especially great.

Employee labor market information: comparing direct world of work measures of workers' knowledge to stochastic frontier estimates

A number of papers use stochastic frontier estimation to measure a worker's incomplete information about available wages. These papers define incomplete information as the difference between a worker's wage and his or her maximum potential wage. Many question this approach since it essentially measures incomplete information as a residual, without independent evidence relating this residual to incomplete information. This paper introduces independent direct measures of workers' knowledge of the world of work obtained from the National Longitudinal Survey of Young Men (NLSYM). Frontier estimates of incomplete information are compared to the direct measures of workers' knowledge. The results verify that stochastic frontier estimates provide a reasonable measure of a worker's incomplete wage information.

The Division of Child Care among Mothers, Fathers, and Nonparental Care Providers in Dutch Two-Parent Families

LISET VAN DUK Utrecht University JACQUES J. SIEGERS Utrecht University* This article examines the division of child care among mothers, fathers, and nonparental care providers during the hours when at least one parent is at work. Data collected in 1993 from 405 Dutch two-parent households with at least one preschool child show that the mothers' potential wage rates, the number of children in the household, and the norms of the people in the household's network affect the participation of mothers, fathers, and nonparental care providers in child care. The availability of institutionalized care and the parents' judgement of the quality of institutionalized care affect the choice of the mothers' care but not the time fathers spend taking care of their children. Key Words: child care, division of labor, Netherlands, preschool children. Research in the area of maternal employment and the division of child care can be divided into two major groups. One studies maternal employment and the use of nonparental care (Blau & Robins, 1991; Fox Folk & Beller, 1993; Leibowitz, Klerman, & Waite, 1992; Van Dijk & Siegers, 1995). Most of this research overlooks the father as an alternative child-care provider. The other studies the division of labor between spouses and focuses on the spouses' participation in household labor, sometimes including child care (Barnett & Baruch, 1987; Coltrane & Ishii-Kuntz, 1992; Coverman, 1985; Ishii-Kuntz & Coltrane, 1992; Pleck, 1985; Van der Lippe & Siegers, 1994). It often ignores the fact that nonparental care can be used and that it might affect the division of child care between husbands and wives. In this study, we examined the division of child care among mothers, fathers, and nonparental care providers in Dutch two-parent families. We addressed child care for preschool children (under 4 years old) when at least one parent was at work. We focused on working hours because an explanation for a pattern of child care during these hours may differ considerably from the one pertaining to leisure time. THEORETICAL BACKGROUND The Division of Labor Between Spouses Three main theories explain the division of labor between spouses: the new home economics theory, exchange theory, and role theory (Presser, 1994; Van der Lippe & Siegers, 1994). The new home economics theory (Becker, 1991) predicts that the spouse with the highest earning potential will spend more time in paid labor and the other spouse will spend more time in unpaid labor. This maximizes household income. Women's wages typically are lower than men's wages. Therefore, the new home economics theory predicts that women spend more time in household labor and child care, and men spend more time in paid labor. It also predicts that the higher the woman's wage, the lower her share of household labor and the higher her share of paid labor. These predictions have been confirmed in some studies (Gronau, 1977; Kamo, 1988; Presser, 1994; Ross, 1987), but not in others (Coverman, 1985). According to exchange theory, the division of labor between spouses results from their relative resources, such as income and education (PerryJenkins & Crouter, 1990). Assuming that individuals do not like to do housework, this theory predicts that the spouse with the greater resources will have more power and will use it to minimize her or his housework. Earnings are kept in the event of divorce, and because men usually have higher earnings, the monetary cost of separation and divorce is lower for men than for women (England & Farkas, 1986). This gives men more power. Exchange theory predicts that men spend less time than women in household labor, including child care, and that the more resources a spouse has, the less time he or she will spend in household labor. Thus, the predictions, as well as the empirical results, are similar to those of the new home economics theory. …

Multiple Worker Households and Multiple Job Holding: Rigid Vs. Flexible Hours

The paper examines a household production model in which there are two potential wage earners. One of the workers has two job possibilities. His or her higher paying job requires the worker to work a pre-determined, non-negotiable, number of hours. This job is a “Rigid Hours” job. The other jobs that may be taken by the household members allow the workers to optimally determine the number of hours worked. These jobs are “Flexible Hours” jobs. The paper examines the household's optimal response to the constraints imposed upon it by the rigid hours job, as well as the usual time and budget constraints. The interdependence of the household member's labor supply decisions is well established in the household production literature. Shisko and Rostker (“The Economics of Multiple Job Holding,” American Economic Review, 1976) provide a model of multiple job holding but do not consider a two person household or a complete set of time constraints. This paper will develop a framework for studying all of these disparate elements. The time allocations of “husband” and “wife” may seem paradoxical at first blush; a person may choose a lower paying job over a higher paying one; the “husband” may drop out of the labor force to be replaced by his lower paid “wife;” and the higher paid “husband” may do housework even though the marginal value of housework is less than the “wife's” wage. The key to these paradoxes in the time allocations of households is in the constraints.

The Effect of Health on the Work Effort of Single Mothers

Data from the Survey of Income and Program Participation are used to investigate ways in which health influences a single mother's decision whether to work: the direct effect of a woman's health on work effort and potential wage; the impact of her children's health on hours available to work; and the impact of health on the values of health insurance and Medicaid associated with work and AFDC participation, respectively. Simulations suggest that wage subsidies and decreases in AFDC benefits are unlikely to increase the labor force participation of single mothers in poor health or with disabled children, as they face limitations on work hours and the kinds of work they can perform that prohibit them from earning enough to stay out of poverty. Extending health insurance coverage to all children of single mothers regardless of AFDC status would induce a large percentage of these mothers to seek and accept employment, as would a pay-or-play insurance plan covering all workers (and their dependents) who work 15 or more hours a week.

Probability of Being Employed Part-Time in Retail Sales

Since 1980 the percentage of the workforce engaged in part-time employment has increased, attributed to increase in service and retail industries and changing attitudes and lifestyles of workers. The purpose of the present study was to determine characteristics associated with choosing part-time employment in retail sales occupations. The data set was the 1985 Current Population Survey, refined to limit the sample to 849 persons currently employed in retail sales occupations (U.S. Department of Commerce, 1985), 82% who worked in soft goods and 18% in hard goods. Logit regressions tested models of characteristics such as gender, race, presence of children, and potential wage rates as to significance in increasing the probability of choosing part-time employment. Gender was an important predictor of work choice, with women more likely to work part-time than men. Women were more likely to work part-time if they were white, married, had children and lived further from the central city.

UNDERPAID and OVERWORKED: MEASURING THE EFFECT OF IMPERFECT INFORMATION ON WAGES

This paper investigates the degree of shortfall between the wages workers earn and what they could earn assuming perfect or costless information in the labor market. We use the stochastic frontier regression technique to estimate the degree of shortfall found in wages on an individual basis. The paper tests, in addition, a number of hypotheses supplied by search theory in this context. The results generally confirm the propositions from search theory and indicate that, on the average, worker wages fall short of worker potential wages by approximately 10 percent.

Training and job search in the labor market

The objective of this study is to formulate and analyze an integrated decision model of training and job search in the labor market. The paper extends the existing job search theory by allowing the individual to undertake costly training activities which affect his potential wage offer distribution. We characterize the structure of the individual's optimal training strategy, and present various economic implications of our proposed model.

Time Value and Its Impact on Household Food Expenditures Away From Home

Food away from home (FAFH) expenditure equations derived from household production theory stress the importance of of time constraint implicit in house hold decision making. Numerous methods have been suggested in the literature to quantify the value of time. The measure of time value developed in this study was based on the opportunity cost approach and indicates the importance of correcting for labor force participation selection bias when estimating potential wages for non-labor-force participants. In general, value of time, income, house hold size and composition, and other environmental variables significantly influ enced FAFH expenditures. The results also indicate the importance of distinguish ing between FAFH expenditures at different types of eating places.

The Demand for Labor Market Information

Government-run employment information services have been set up in an attempt to aid workers in the job seeking process. By providing information to workers, the government hopes to improve the match between supply and demand in the labor market [3]. However, recent research has shown that unemployed workers use direct search methods such as contacting friends, relatives or just firms more frequently than their use of labor market intermediaries. In addition, workers using these direct search methods generate better job offers than workers using indirect methods [12]. Such findings raise the question of why anyone would use a labor market intermediary instead of relying on friends, relatives or direct firm contacts. This paper attempts to answer this question by building and testing a model of the job seeker's demand for labor market information. The literature on job search has maintained that knowledge about particular firms' potential wage offers is valued by job seekers since it enables them to decide which firms to contact first [18; 22]. Our model of the demand for labor market information involves the weighing of this benefit against the time costs involved in seeking out labor market intermediaries. Unlike earlier work on the determinants of search strategies [12], the theoretical model we devise makes specific predictions about several factors that would affect one's use of labor market intermediaries: a lower discount rate, a lower initial stock of labor market information, greater coverage by unemployment insurance (UI), and higher variance of one's wage offer distribution all are expected to increase the use of intermediaries. These theoretical predictions are tested on the 1981 wave of the National Longitudinal Surveys (NLS) youth cohort aged 14-21 in 1979. We find support for most of these hypotheses, particularly for the impact of UI, information stock and wage offer variance. The effect of UI suggests that this government program subsidizes the collection of labor market information, which, as suggested, is an essential component of efficient labor market adjustment. If the privatelygenerated quantity of information is suboptimal, due possibly to risk aversion on the part of

Migration Amongst the Batswana

The hypothesis presented in Todaro (1 969), that the likelihood of finding work in town influences the rate of rural-urban migration, now enjoys the status of a received doctrine. Assuming potential migrants indeed respond to this employment probability, the model of Harris and Todaro (I970) demonstrates that, in certain parametric ranges, urban job creation may actually exacerbate unemployment and even reduce national product. This result has had considerable influence on policy formulation in LDCs, by emphasising that, in the urban sector, the social opportunity cost of labour may not be insignificant despite burgeoning unemployment. Yet neither the Todaro hypothesis nor prevalence of the Harris-Todaro parametric range has been adequately, empirically explored. Many estimates of macro migration equations do exist, normally relating the proportion of population migrating to average wages in differing locations and occasionally to average population characteristics. But in Lucas (I 975), I show that the popular nonlinear specification of such macro functions may well display serious specification error bias; a nonlinear function of the aggregate variables is not simply the average of underlying micro migration decisions related to the disaggregated variables. Thus, although a few estimates of macro migration equations have also incorporated average unemployment rates, usually in developed country contexts and with mixed results, these analyses are at best very circumscribed tests of the Todaro and Harris-Todaro theories. On the other hand, surprisingly few estimates of micro migration response functions have appeared. In part, this probably reflects the difficulty of dealing with unobserved variables. For example, suppose whether or not each person moves to town is to be related to his or her wage at home compared to the relevant wage in town. In a typical survey, for those individuals who remain in the village the wage they would command in town is not observed; for those who have moved to town, the prior rural wage is usually not reported. DaVanzo (I976) deals with this problem of unobserved variables, in a US context, by introducing a multivariate wage equation to predict potential wages in alternative locations for each person using their observed personal characteristics. However, this broad approach suggested by DaVanzo has not previously been extended to incorporate unobserved employment probabilities in alternative locations. IThus, in surveying the literature in i980, DaVanzo concludes:

The Estimation of Fertility Equations on Panel Data

This discussion focuses on some of the econometric issues that arise when one tries to estimate fertility equations on panel data sets of individual (micro) observations. As far as this author knows there has been only 1 published study (Heckman and Willis 1976) in which micro panel fertility equations were formally estimated. Most fertility equations estimated in other studies have used completed fertility rather than the number of children at each point in time as the dependent variable have used cross section rather than panel data and/or have used grouped rather than micro data. This paper presents estimates of micro panel fertility questions. The dynamic content of panel data directs attention to the timing of fertility in contrast to the focus on completed fertility with for example a cross section of data for women past childbearing ages. A point of departure is to modify the standard static demand for completed fertility model into an intertemporal model by means of a life cycle model with complete certainty. In such a model a couple at the beginning of marriage considers several lifetime budgetconstraints: the usual income expenditure constraint requiring that money expenditures over the lifetime on all goods including children equal total lifetime resources including nonwage income and the discounted value of the earnings of the husband and wife; a production function constraint showing the amount of the wifes time that must be devoted to childbearing; a human capital constraint showing the effect of being out of the labor force on future wages; and the usual time constraint in which the wifes available time is exhausted by time in leisure in childbearing (and associated housework) and in market work. Given the knowledge of the prices potential wage rates and other variables in these constraints the couple would choose a lifetime profile of all goods that yield utility including the number of children at each time K1. To provide an empirical illustration of the estimation techniques several fertility equations were estimated with data from the National Longitudinal Survey of Young Women (NLS). Both a tobit equation for the number of children and a probit equation adjusted for the truncation of the error term from below (as a result of the fact that the number of children cannot fall) were shown to yield similar estimates.

Children's Health Problems and Maternal Work Status

Data from the Survey of Income and Program Participation are used to investigate ways in which health influences a single mother's decision whether to work: the direct effect of a woman's health on work effort and potential wage; the impact of her ...

Wage Functions and Occupational Selection in a Rural Less Developed Country Setting

ECONOMISTS are just beginning to develop empirical knowledge about the basic relationships that determine the distribution of incomes and allocation of resources in the poor rural regions of the world. Understanding interactions between agriculture and the rest of the economy is particularly important in this context. This paper empirically investigates the allocation of human resources between farm work and other jobs and the compensation received by individuals for their work in agriculture and elsewhere. Specifically, two related tasks are undertaken in this paper: (1) the estimation of wage functions; and (2) the estimation of functions determining the allocation of time among occupations. There have been a series of papers which estimate the earnings function using data from poor countries. (For examples, see Blaug (1974); Chiswick (1977); and Valdes (1971).) However, this study focuses not on total earnings but on the wage rates a person may earn in labor market work, because the wage rate is the relevant price of time for many allocative decisions. For example, in dividing the work year between self-employed farming and work as an employee off the farm, a key price is the potential wage rate the person can earn in the labor market. (For discussion and evidence on this issue, see Sumner (1978).) Recently, a few studies have appeared which illustrate the importance of understanding potential wage variations across individuals in less developed countries. Rosenzweig (1978) uses wage estimates from aggregate Indian data in a model determining the impact of land reform. Bardhan (1979) develops wage functions from a sample survey in rural India as a step in estimating labor supply for rural households. Kusnic and DaVanzo (1980) use wage functions to impute potential incomes and to measure the full income distribution. These previous studies illustrate the importance of understanding the determinants of market wages. The present paper develops wage functions in more detail, focusing especially on industrial differentials. In many rural areas employment opportunities may be usefully categorized into (1) self-employment (mainly on small farms); (2) work for wages on large farms; and (3) work for wages in non-farm industries. The combination of selfemployment and work as an employee is also important in many rural areas in both rich and poor countries. This paper examines the impact of personal characteristics on the choice to participate in work for wages and on the choice of industry. These estimates also form a basis for studying industrial wage differentials. Tentative estimates of the dependence of participation on expected wages are also presented below. The empirical analysis in this paper is based on a 1974 sample of five villages in central Guatemala (see Corona (1978) and Stein (1978)). One village, Petapa, is larger, richer and more urban than the others. It lies south of Guatemala City within commuting distance of the capital. The other villages are outside the capital city region. The population sampled is almost exclusively ladino (Spanish culture as opposed to Indian). Data are available on the earnings, hours of work, industry, age, schooling, literacy, and village of 1,005 male heads of households. Approximately one-third of the sample work as both self-employed farmers and hired workers, and most of these men work on fincas (large plantations). Another quarter of the sample work as self-employed farmers and do no work for wages. The suburban village has mostly nonagricultural workers, whereas the four other villages have predominantly farmers and farm employees. In Received for publication June 21, 1979. Revision accepted for publication December 31, 1980. * North Carolina State University. Research on this paper began while I was a Rockefeller Foundation supported Post-Doctoral Fellow in the Labor and Population Group of the Economics Department of the Rand Corporation and continued at North Carolina State University supported by the Agricultural Research Service. At Rand, Robert Newman served as my research assistant and at N.C. State, James Cochell provided able assistance. I have benefited from the comments of colleagues at both institutions and from members of the Labor Economics Workshop at The University of North Carolina at Chapel Hill. I also thank two anonymous referees for useful suggestions. This is paper number 6558 of the Journal Series of the North Carolina Agricultural Research Service, Raleigh, N.C.

Race and Sex Differences in Career Dynamics

In this paper, career differences by race and sex are analyzed. Careers are defined as trajectories of socioeconomic status and wages and are described by a linear differential equation model. It is assumed that the different groups defined by race and sex tend to be in different labor markets and economic sectors and to face different opportunity structures even within labor market divisions. This assumption guides predictions for and interpretation of results with respect to various aspects of career inequality: initial status and wage level; potential status and wage levels; effects of human capital, family background, and family of procreation variables on initial and potential wage and status levels; speed of advancement. Pooling of cross-sections and time-series techniques are used to estimate the model, with data from the National Longitudinal Surveys of the Labor Market Experience of Young Men and Women.

Economic Mobility, Monopsonistic Discrimination and Sex Differences in Wages

Economists have often attributed wage differences between men and women to three general causes: differences in personal characteristics such as education or experience; the psychic cost of working with women (taste discrimination), discussed, for example, by Becker [3] and Arrow [1]; and women's relative lack of job choice resulting in a poor bargaining position and monopsonistic exploitation in the labor market, as suggested by Krueger [19] and Madden [24]. This latter form of potential wage discrimination, due to limited job opportunities or immobility in the labor market, however, has received the least attention in the literature. Little empirical evidence exists on whether monopsony actually influences the wages of men and women and on how the several sources of economic immobility, such as occupational segregation, unionization, and geographical factors, affect the degree of monopsonistic exploitation among both sex groups. Our purpose in this paper is to propose and implement a direct test for the effects of monopsonistic wage exploitation on sex differentials in wages to identify the proximate sources of monopsony-in particular, occupational patterns, union activity and geographic mobility. In Section II the existing theoretical and empirical work on monopsony in the labor market is reviewed and an empirically testable functional form is derived from the theory. In Section III the theory is implemented empirically based on micro data from the 1970 Public Use Samples combined with aggregate SMSA data. Supply elasticities characterizing males and never-married females are estimated for each of 95 SMSAs and included in regressions on SMSA-level wage data. The results obtained suggest that women's wages appear to be significantly more affected by monopsony than are men's, especially in areas characterized by high union activity and relatively low rates of female participation in male occupations.

Employment trends of young mothers and the opportunity cost of babies in the United States

The central concept of microeconomic theories of fertility is opportunity cost--the product of wife's employment lost due to childbearing and the value of her employment. This paper presents a model for analyzing opportunity cost using panel data. The average loss of employment attributable to a second- or higher-order birth, calculated at around age 2, is over 400 hours per year. This time cost represents an income loss of about $1050 in 1969 dollars. Time cost is independent of such demographic factors as birth order and age of oldest sibling. Neither does time cost depend on husband's wage rate or wife's education or potential wage rate. This indicates that many microeconomic models of fertility have been seriously misspecified. The paper also compares results from static and dynamic models, explores possible problems due to simultaneity bias, investigates the relationship between changes in employment (including time cost) and initial employment level, and identifies the difficulties of theorizing about opportunity cost.

Risk Aversion, Risk, and the Duration of Unemployment

A jobseeker's attitudes towards risk and his perception of the risk inherent in the labor market he is searching have been shown to have a theoretical effect on his expected duration of search, when he is assumed to be searching for jobs in an optimal fashion.' However, no empirical research has adequately tested for these predicted effects.2 This article presents estimates of a reduced-form equation derived from the job search theory3 and tests the following two hypotheses: (1) as the standard deviation of the distribution of potential wage offers increases, an individual's expected duration of unemployment will increase, ceteris pariblis; (2) an individual who is more risk averse than another will have a shorter expected duration of unemployment, ceteris paribbls. The empirical results presented here tend to support both of these hypotheses. Both Kohn and Shavell (1974) and Pissarides (1974) prove, within models of optimal job search, that the more risk averse a job seeker, the lower he will set his minimum acceptable, or reservation, wage. The reservation wage is set to equate the marginal cost of an additional period of search with the expected marginal return from search; any job offer exceeding this wage is accepted and unemployment terminates.4 Determinants of the individual's reservation wage include costs of search, his risk preferences, and his view of the distribution of possible wage offers facing him. As an individual lowers his minimum acceptable wage he will shorten his expected spell of unemployment, given that the distribution of wage offers from which he draws is unchanged. Hence, the more risk averse jobseeker, by lowering his reservation wage, will have to search a shorter period of time, on average, to find an offer acceptable to him. The effect of wage dispersion on duration of unemployment (allowing for adjustment in the reservation wage) cannot be predicted in general from models of job search, despite the belief expressed (from Stigler (1962, p. 236) to Hall (1975, p. 324)) that this effect should be positive. However, when a rectangular wage offer distribution is posited, the intuitively appealing hypothesis (1) can be obtained from a static model of job search (for example, McCall's model (1970)). While the regression specification used in this study to test the two implications presented above was developed in the context of the job search theory, alternative theories could produce these results; hence, the empirical work discussed here is not seen as a test of the search theory.5 Instead, a negative relationship between risk aversion and duration of unemployment could reflect a tendency for individuals to choose occupations and industries with patterns of employment suiting their risk preferences. And a positive association between dispersion in potential wages and duration may

Education: Consumption or Production?

This paper attempts to determine whether the relationship between education and income results because schooling allows individuals to earn higher income or because higher income individuals purchase more of all normal goods, including schooling. Education is treated as a joint product, producing potential wage gains and utility simultaneously. The framework permits estimation of the rental price of a unit of education, net of consumption effects. The major finding is that education does causally produce income. By moving from 0 years of schooling to 12 years, the mean individual approximately triples his wealth. More surprising is that education is a bad." Individuals stop short of acquiring the wealth-maximizing level of education because of the disutility associated with school attendance.

Female labor-force participation, occupational choice, and fertility in developing countries

A model is presented in which female labor-force participation, family size, occupation, and the demand for mother-substitutes are joindy determined under assumptions relevant to the less developed country (LDC) context. The model is tested using (1) household data from the 1970 Puerto Rican Public Use Sample and (2) an intercountry cross-section sample. Evidence is obtained that female potential wages rising pari passu with each other will be positively associated with both labor force participation and fertility. However, it is shown that this pronatalist effect may not hold for potential wage rate rises limited to specific occupations, because of differences in occupation-child-rearing compatibility.