Arnold Kling  

Imputed Income

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Jeff Madrick discusses the work of Elizabeth Warren and Amelia Warren Tyagi on the plight of middle-class two-income families with children.


what families spend a lot more on, the authors calculate, is a house in a safe neighborhood with a good school — about 70 percent more a year, discounted for inflation, for the typical family of four. The scarcity of good schooling has created a bidding war that drives up house prices in first-rate school districts.

...The other factors driving spending are largely the costs of the two-income family. The authors find that typical payments for day care and preschool for two children can add enormously to the household budget.

...The upshot is that two-income families often have even less income left over today than did an equivalent single-income family 30 years ago, even when they make almost twice as much.

I do not have their data, but my guess is that it is similar to this analysis.

In comparing a hypothetical two-earner family today with a hypothetical one-earner family of the past, I worry about failing to impute any value to the child care and housework provided by the stay-at-home parent. If your hypothetical one-earner family seems better off, that may be because its income was actually higher, once you include the value of noncash income that the non-earning spouse provided.

UPDATE: Stephen Karlson has more thoughts and many more links on the topic of child care and family income.

For Discussion. How does this issue cause the growth rate in average family income to overstate the increase in well-being?


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CATEGORIES: Income Distribution



COMMENTS (28 to date)
Eric Krieg writes:

I predict that this topic will take the record for most posts!

>>...The other factors driving spending are largely the costs of the two-income family. The authors find that typical payments for day care and preschool for two children can add enormously to the household budget.

Mcwop writes:

In the NYT articles it states: “There is little doubt that some Americans are spending ostentatiously. But this Labor Day week it is appropriate to debunk the oversimplification. As Elizabeth Warren and Amelia Warren Tyagi convincingly claim, most Americans do not fit the bill. What is driving Americans into debt, they argue, is not superficial luxury spending but necessities.”

This assumes that children are not a luxury, but are some sort of necessity. Having children creates or increases the necessities discussed in the article. Shouldn’t the cost of not having children be imputed?

Next, shouldn’t an adjustment for the number of hours worked be imputed? Two people each earning $50,000 by working 50 hours per week have a household income of $100,000 (top 10% of taxpayers). But they work 100 hours to get it, where someone else might earn the same, works fewer hours (say 60 total), but each household pays the same tax.

This situation makes me think of a consumer that purchases an item on sale at 25% off. It cost them $75 after the reduction, and they brag about saving $25. Of course, a no purchase decision saves them $75.

My full disclosure: deciding to not have kids, because it requires fertility treatments. I estimate that I am saving $10,000 to $30,000 in upfront child costs, and a lot of headaches. Might sound crass, but that would be a significant financial step backwards in getting the best for the kids. My wife and I may still adopt one day if we feel we have the means.

Matt Young writes:

I live in an area with the best schools and this has driven up the price of housing enormously. My wife and I plan to move from the area when our son went to college. The economic collapse hit (Silicon Valley) and we borrowed to remain in the area for our son's last year of high school. Essentially his last year of high school cost us $40,000; while his first year of college will cost us $6,000; quite a difference!

Mats writes:

Thank you, very interesting post. The observations are indeed important in analyzing GDP growth. During periods when women increase their labour market participation, leaving kids at day-care centers, GDP is "artifically" increased.

Interestning comments too, Eric Krieg writes >>So true! So many women are working who ABSOLUTELY do not need to be, if only they would calculate how much day care, taxes, health expenses (kids in day care are ALWAYS sick), etc. are costing them.>>, and he has to come from a very backwards culture. Substitute "women" for "men" in the quote and you will see. Why should women give up careers for homemaking? Because they trust their husband to share their income with them and don't realize that he might choose a new younger wife if he so affords!

That "diamonds are a girls best friend" seems yet to be discovered in north america!

Eric Krieg writes:

>>he has to come from a very backwards culture.

Eric Krieg writes:

>>Substitute "women" for "men" in the quote and you will see. Why should women give up careers for homemaking? Because they trust their husband to share their income with them and don't realize that he might choose a new younger wife if he so affords!

Eric Krieg writes:

>>Substitute "women" for "men" in the quote

No. I won't do it.

Men are not substitutes for women. And vice versa.

We are not interchangeable. We are different, created so by nature. We have different needs and desires. And abilities.

So why on earth would you assume that one gender can be, or should be, substituted for another.

What the hell is so good about working? Why should our entire society be subserviant to people's careers? That's madness. That's not the way to create a healthy, functioning society that will REPLICATE ITSELF.

What good is a society that doesn't reproduce, because the female members of that society wasted their prime childbearing years working?

Mats writes:

In a secular culture, marriage is a mutual contract that can be cancelled - it is more like employment than slavery. The idea of husband and wife being each others property is the old backwards idea mainly used in agricultural societies. Is it still in use in the US? Krieg writes: "Well, first of all, we used to have divorce laws in this country with teeth. There was no such a thing as "no fault" divorce. Divorce was only allowed when there was cause, like infidelity."

Not the imperfectum here, it is "used" and "was", so maybe after all the US is developing?

Krieg continues: "the party commiting the adultry would be taken to the cleaners for breach of contract." and he is probably right here. But the man, having developed his career during the marriage, will benefit from this even he was in breach of the contract. The woman will lose most of her parts in the value of these skills.

Finally, there is a point were there is agreement: "The fact is, CHILDREN were much, much better off before 65% of mothers with infants started working.".

And yes, this is a problem, a undesirable side effect of productivity growth. Labour is getting more expensive hence the cost of raising kids. As long as our preferences for raising kids will not increase with productivity, kids will be fewer (in productive countries), or will be worse off.

Eric Krieg writes:

>>In a secular culture, marriage is a mutual contract that can be cancelled - it is more like employment than slavery.

Not in a healthy society that realizes that marriage is the vehicle that best propogates that society. Sociologically speaking, since children of divorce do so poorly in every life measure compared to children of married folks, it is in societies interest to make sure that the divorce is not done for frivolous reasons, and that the parties are serious about the dissolvement.

Let's be clear. The problem isn't necessarily when parties want the divorce, although I think that it is society's interest to make sure that the divorce doesn't happen before counseling, a separation of some time, etc.

The problem as I see it is that under no fault one party can dissolve the relationship without cause.

Eric Krieg writes:

>>Not the imperfectum here, it is "used" and "was", so maybe after all the US is developing?

What are you, a cheese eating surrender monkey or something?

Oops, sorry. Incivility again.

Loose the Euro-sneer. It's not helping the conversation.

Eric Krieg writes:

>>And yes, this is a problem, a undesirable side effect of productivity growth. Labour is getting more expensive hence the cost of raising kids. As long as our preferences for raising kids will not increase with productivity, kids will be fewer (in productive countries), or will be worse off.

This is exactly why I dislike economists: utilitarianism is like your religion.

So because you can rationalize the process that leads to childless societies, that makes it allright?

And because you have invented an economic rationalization, we shouldn't bother investigating other causes, be they sociological, fiscal, spiritual, or otherwise?

Eric Krieg writes:

Mats, can you explain to me why the US fertility rate peaked in 1957? And can you explain to me why the record for the year with the lowest fertility was in the 1930s?

Productivity is not the only driver of fertility. At the very least, it is not a linear process. Other societal phenomonon can overwhelm it.

Mats writes:

Eric - >>since children of divorce do so poorly in every life measure compared to children of married folks, it is in societies interest to make sure that the divorce is not done for frivolous reasons>>

Me - That's my point exactly. And that's why you shouldn't build marriages on a model where one part is providing basic care and services, and the other providing the money.

1.It gives the breadwinner a pecuniary motive to leave.

2.It drives a social wedge between the caregiver and breadwinner that in itself threatens the marriage.

3. If the marriage is broken up, it makes it hard for the breadwinner to continue the relationship with the children, thus making the divorce catastrophic for them.

Eric Krieg writes:

Congratulations, Mats. You are the first person on this site to make me feel like I'm in the Twilight Zone.

>>1.It gives the breadwinner a pecuniary motive to leave.

Being what? If he leaves because he is cheating, he has broken his contract and will be taken to the cleaners. The contract is keeping him from leaving.

>>2.It drives a social wedge between the caregiver and breadwinner that in itself threatens the marriage.

Again, how so? Social wedge? What's that? That the two have nothing to talk about? One is from Mars (the world of work) and one is from Venus (the world of childcare, etc.)?

>>3. If the marriage is broken up, it makes it hard for the breadwinner to continue the relationship with the children, thus making the divorce catastrophic for them.

Mats writes:

Eric, your argument against 1. above contradicts your argument against 3. please clearify if you think money a is motive or not! On 2. we seem to agree, there is a wedge between life at work, and life at home! I have no studies about breadwinners relationships to their children ex divorce. Can't we take it for granted that it is harder to keep contact with your children if you often are very busy at work!?

Your final comment finally make it: let's lock out women from the labour market so they can't leave home! What century are you from, what country, is it the burkha-monging taliban I'm discussing with!?

Eric Krieg writes:

Mats, of course, we have to start from the position of free will. No one should be forced to do anything that they don't want to. We are not the Taliban, of course.

But I don't think that you understand the way in which MANY women have been made to feel that they MUST work in order to be complete human beings. That is total crap. It is reinfoced by our educational system, whose employees, after all, are majority career women.

A society that feels that the rasing of children is something to be farmed out to others is not one that is going to last past two generations.

BTW, your comments imply that a women either has a career or has children. I'd like to see a society that understands that women have a very small window of prime child bearing years at a relatively young age. Understanding this, women would be supported in having children in their twenties and a career in their fourties, not the other way around as today (and understanding that it is near impossible to have children unassisted after 35).

Eric Krieg writes:

>>Eric, your argument against 1. above contradicts your argument against 3. please clearify if you think money a is motive or not!

If marriage is a true contract, enforcable in a court of law, I don't see why money has to be a motivating factor.

I don't see why the man having an independent income has any bearing on his leaving (he is still abandoning his children), and I see the woman having an independent income as facilitating the no fault divorce process (there is less to contest if she has her own income).

Eric Krieg writes:

>>In a secular culture, marriage is a mutual contract that can be cancelled

I can't believe I let this one get past me without comment.

Marriage is much more than a simple contract between two parties. It is the foundation of the family, which is the foundation of society. This is why children of divorce do so poorly, and only slightly better of children born out of wedlock (bastards, for shorthand). A home with a shaky, or no, foundation is a very poor home indeed.

So, because society has such a stake in the marriage, and pays so many costs for failed marriages with children, it seems to me that society should have a say in when and how that contract is dissolved.

Specificaly, requiring counseling and a period of separation are two commonsense requirements. A bit of a burden for the divorcees, but then, when their children end up in jail, that's a bit of a burden on all of us.

Eric Krieg writes:

You know, there is a strain of libertarianism that says that, if it feels good, and it doesn't hurt anyone else, then it should be permissible. No fault divorce was one result of this thinking.

The problem I have with libertarians is, who gets to decide if it hurts someone else or not. I think drug use, as one example, hurts many people. Even a benign drug like pot lowers the productivity of heavy users. Society in general pays a price for pot use, and this is a cost that libertarians don't acknowledge.

I don't want to get in an argument about drug use. I jus want to point out the nihilism of libertarians, like, I think Mats arguments fall under.

If, by maximizing personal freedom, you destroy society, what good have you done?

Mats writes:

Eric, I fully agree that anything society could do to make it easier to be a child, and to make it easier for mothers and fathers to have children would be a good thing. However, I strongly rejcect the idea that society should force fathers away from the family out on the labour market, and try to keep mothers away from the labour market, kept inside the family.

Sounds very much like the taliban to me...

Eric Krieg writes:

>>Sounds very much like the taliban to me...

Then why aren't you concerned with the reverse? Why aren't you concerned with an educational system that tells young women that they need to have a career in order to be a complete human being? That a career must come BEFORE children.

Keep in mind that I'm not talking about using government for any ends here. That would be like the Taliban.

I'm talking about changing the culture. And, thank God, at least in America, the culture seems to be changing a little bit. The percentage of mothers with young children who work has declined slightly in the last few years. And the divorce rate has stabilized. And the number of children born to teenage mothers has plunged. All good signs, I think.

Mats writes:

Sorry Eric, but now you really begin sounding like the taliban, women should do this, women should not do that:

Women should not have children when they are in their teens. Women should have their career when the children have grown up. Women should not leave their husbands.

And then implicitly, men should not do such things as taking care of home and family. They should rather, kalashnikov in hand, fight for the honour of their women, or?

Eric Krieg writes:

So there are no standards, and people should be able to do whatever they want, damn the consequences?

And, of course, no one should be RESPONSIBLE for the consequences of their actions, especially MONETARILY.

And those of us who through sheer luck have functional lives that generate cash should be expected to pay for everyone else. And shut up about it, to boot.

Eric Krieg writes:

>>Women should not have children when they are in their teens.

Actually, they're girls, not women.

It there any argument that girls should not be having children? Even Bill Clinton, who is not a member of the Taliban, agrees with that.

Although, Clinton MIGHT have personally created some of those teen mothers! Monica was barely out of her teens.

Mats writes:

Congrats for living a "functional life" Eric!

Eric Krieg writes:

Yeah, I generate cash too. But of course, my wife thinks that I don't generate enough of it.

Eric Krieg writes:

I read a "study" once that said that, statistically speaking, to achieve a "functional life" (a scoiological euphamism if ever there was one) one simply needed to finish high school, not have children before age 21, and have those children within wedlock.

If I remember correctly, the measure of functionality was never having accepted welfare benefits.

Eric Krieg writes:

If you can get over your own personal hangups and need to call those you disagree with as "The Taliban", you can find some pretty cool research in this area.

I thought this paper was cool, even if it doesn't totally jibe with what I argued above:

http://www.russellsage.org/programs/proj_reviews/si/revmartin01.pdf

The intersection of culture and economics is very interesting to me.

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