Notburga Ott

Income Inequality and Poverty in Eastern and Western Europe: An Introduction

Issues of economic inequality and poverty have been of interest for many decades. There are at least three reasons why inequality and poverty is currently a growing “branch” of scientific research. The monitoring of inequality, poverty and their impact on society is no longer a research question only for economists, but social sciences are also analyzing these topics. In Western Europe, or more precisely, within the European Union, the “War on Poverty” is an official topic for the Commission of the European Union. In Eastern Europe, growing inequality and the development of poverty are crucial issues resulting from the transition process of the old “socialist economies”. The collapse of the Berlin Wall and the subsequent reunification of Germany are only part of a broader process of world-wide change. Other important patterns include the convergence of economic and social organization despite decades of historical differences. As a consequence comparative research in the social sciences is becoming more and more important.

The Use of Panel Data in the Analysis of Household Structures

Longitudinal data are necessary for the analysis of household dynamics. In comparison to retrospective data, data from panel surveys have some advantages in this type of analysis. On the other hand, some specific problems arise with panel data. Both options and problems are illustrated in the German Socio-Economic Panel. To support different types of analysis with panel data, a special data management in a relational database with time tables is helpful. Finally, the ‘fuzziness’ of household definitions is shown with some selected examples.

Empirical evidence of the bargaining approach - first findings with German data

Up to now, empirical research based on bargaining models was scarce. Nevertheless, the results given in the few empirical papers presented in the previous chapters indicate the empirical relevance of the bargaining model. These results are consistent with the bargaining model whereas they can hardly be explained with competing approaches. In spite of this, at present, it cannot be decided whether and for which questions a model of the traditional type suffices as a basis for empirical analyses. A strong empirical test of the bargaining approach against traditional models cannot be developed easily, this is due especially to the problems in modelling the conflict payoffs. However, we can state that the advantage of the bargaining approach consists in providing a comprhensive framework for explaining of different family decisions, from which new, supplementary perspectives on many problems result. In this chapter some first estimates based on German data will be presented. Of course, they cannot be seen as a strong test of the bargaining model against the traditional approach. Nevertheless, they confirm the empirical evidence of the bargaining approach, and they demonstrate different types of analysis that are possible with bargaining models.

Survey of empirical bargaining models

This chapter includes a short survey of further empirical research that is based on the idea of intrafamily bargaining. These models do not provide a strong test of bargaining models against traditional approaches, but give at least some indirect evidence. They are based on individual utility functions and reject the hypothesis of a joint household utility function. Some approaches focus primarily on Pareto efficiency, but there are also empirical studies in which the threat point or the intrafamily bargaining power are modelled explicitly as functions of some exogenous variables.

Time allocation in a static bargaining model with household production

The discussion of the intrafamily division of work in chapter 2 shows that three types of time use should be considered. The output of some activities can be transferred between family members, whereas the benefits from other activities are derived only by the individuals involved. Time spent on market work is used for earning income which is transferable. In economic literature, the term market work is usually used in this sense. On the other hand, the terms household production, housework, home production, homework, do-it-yourself work, consumption time and leisure time are used differently and are seldom clearly distinguished one from another. In the following, household production or household work is understood as the production of commodities in a household that can be transferred interpersonally. But, because of high transaction costs, normally these goods are exchanged only within the household. In opposition to this, leisure stands for all activities requiring a time input by the individual consumer.

Models of the ‘new home economics’

Microeconomic household theory traditionally deals with questions of labor supply and consumer behavior. No distinction is made between an individual or a household of several members. New concepts in the mid 60’s however, such as the formalization of the human capital concept (e.g. Schultz 1959, Becker 1964), the consideration of consumption technology (e.g. Lancaster 1966, Muth 1966) and of time costs (e.g. Becker 1965) have led to a new approach on household behavior: the analysis of optimal time allocation was extended to include household production. Earlier theories have considered the ‘household’ as synonymous with the ‘individual’. But in the meantime, the question of different time allocation patterns of individual household members [-] especially female labor supply [-] moved into focus (see Killingsworth/Heckman 1986). In most cases however, the household is still considered as a unique decision unit, and interactions between household members are neglected. This approach is often vindicated by the argumentation of Samuelson (1956) who discusses the existence of a family utility function.

A dynamic model with accumulation of human capital

In the previous chapters the effects of wage and price changes were investigated in a static bargaining model. As we have seen, such changes result in systematic changes of the conflict outcomes. But up to now, only exogenous wage changes have been considered. If the changes of the conflict points have significant effects on the internal distribution within the family, the question arises whether such modifications depend only on exogenous factors, or whether the decisions made in the family also influence the external alternatives outside of the family.

Empirical tests of the bargaining approach

In the previous chapters a theoretical bargaining model for family decisions was developed, which was applied to questions on labor supply and intrafamily division of work. Also some hypotheses regarding fertility and divorce behavior were derived. For all these questions the model provides a consistent analytical framework. As was shown, the results differ from those of traditional models with a joint household utility function. Nevertheless, the empirical relevance of the bargaining approach has yet to be shown. Differences to the traditional approaches as seen in the theoretical derivation should also become apparent in the empirical analysis. In particular, based on the different results, it should be possible to test which approach is able to provide a better explanation model for observed behavior.

Pareto efficiency of family decisions

In the previous chapter, intrafamily division of work was described as the solution of a two-period bargaining game. Such a model allows to analyze problems with as well as those without binding long-term contracts. Regarding intrafamily specialization the propensity to specialize is smaller when long-term contracts are not enforceable. If there are gains from specialization, then it is likely, that in the game without binding long-term contracts a non Pareto-optimal allocation of household resources results. Here the question arises, which conditions must be satisfied for a Pareto-efficient solution.

Introducing uncertainty: the possibility of conflict

In chapter 6 a deterministic two-period model was developed for analyzing time allocation and intrafamily division of work in an existing household. For that purpose, a cooperative solution was assumed for period two as a sub-game perfect equilibrium, because at any time the partners gain in the joint household compared with two single-person households. In such a model the conflict point has been important only for the internal distribution. The conflict payoffs themselves are never realized. In view of the observed growth of the number of divorces and separations this is a rather unrealistic assumption. In general, these dissolutions are not planned from the beginning of the partnership, but result from new knowledge about the characteristics of the partner or about external alternatives. As discussed in chapter 2, in view of an economic model a divorce can be seen as the revision of a miscalculation, which may occur if the individuals have no complete information.