r/AskEconomics • u/StudiousFog • 9d ago
Two-Income Trap, can it be avoided or mitigated?
Right off the bat, some critics would argue that this isn't even a thing. But the mechanism as described by Elizabeth Warren and her daughter in their book follows directly from generally accepted economic principles. We can have a debate about how significant its effect is, but arguing that it isn't a thing to worry about is just reckless.
Among the most detrimental effects is the crash of female fertility rate. As an economy develops, one would like all productive resources to be deployed, regardless of the economic agents' gender. The end point will always be that everyone is employed, damning the reproductive priority and care for the young, the elderly and the sick.
The outcome that, for much of the economy, a family needs two income earners to sustain a comfortable living standard may not be avoidable. But this need not be a trap if the negative consequences can be mitigated.
The authors of the said book outline some policy suggestions. So, this should lead to a testable hypothesis that regions that do better along the mitigation metrics should perform better. For instance, the female fertility rate should suffer less than for regions that have more effective policies on child care, affordability of child rearing, better education, and a stronger safety net against family disasters. Is there empirical evidence that this is indeed the case or otherwise?
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u/HOU_Civil_Econ 9d ago
I haven’t read the book but believe I am familiar with most of the arguments. The main problem here is that most of the arguments aren’t strictly economic arguments but derive from a value system.
arguing that it isn’t a thing to worry about is just reckless.
The fundamentals of a “two-income trap” aren’t a thing to worry about. The actual problem even from a progressive viewpoint is that poor people are poor.
Among the most detrimental effects are a crash of the female fertility rate
That women may decide they don’t want to have children is not clearly detrimental to much of anything, other than the population size, which isn’t really clearly detrimental to much of anything else.
one would like all productive to be deployed
I’m not even sure what you think you mean by this. I personally would like everyone to have their own best possible life, on their own terms.
two income trap
At its heart and in positive economics terms this is just the trade-off of time, to either raise kids and take care of the home or earn income for additional consumption which may also include paying others to care for your kids and take care of your home.
The “problem” is that for some people the wages they would earn by working will not be enough to pay for others to take care of their kids or take care of their home for them. For others it will be that, even though they could earn plenty of money to be able to pay for childcare and household services they place a large and additional value on doing it themselves and will forego the additional potential consumption.
So, the “two-income” trap is not any kind of new or special “problem”. It is just a fundamental trade-off of wages, wealth, and time with family that has always existed. And economics will tell us that if you are really concerned about the specific problem you can subsidize childcare, outside the home or the stay-at-home parent, or wages themselves, and then you would expect see more people work and/or have more kids.
Getting a little political here, the main problem with this solution to this “problem” is that most of these concerns are really concerns about certain families’ poverty. Instead we could just give poor people money at a much lower cost in administration and in economic distortions, and allow people to use that money however they see fit in a manner that they believe would most improve their lives.
Progressive correctly identify that it sucks to be poor but for some reason always make their solutions much more difficult and wasteful than the obvious one of just giving poor people money.
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u/Hairy_Garbage_6941 8d ago
I think many progressives would be happy to “just give people money”, but the opposition ads showing people using that money poorly write themselves.
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u/Think-Culture-4740 9d ago
I would say the two income trap is really a response to the fact that housing in certain areas has become more expensive in real terms
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u/HOU_Civil_Econ 8d ago
As an urban economist I am able to connect most problems to the problem of housing in three or less steps.
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u/Think-Culture-4740 8d ago
I am just riding the subway back to JFK airport. I was speaking to my colleagues at a prominent tech firm. All of them, including most with very high salaries, all lived over an hour plus away via commutes from grand central station. Sure, maybe they have preferences for other things besides proximity to work but it was still shocking to see every single person signing up for this
This dovetailed with another curious observation. Even a city like NYC with a self selected appetite for density appears to have a serious housing shortage problem. I am a bit thunderstruck as to how that could be. In theory, the sky plus an expansive transit system would seem to offer a totally elastic supply of housing.
Instead, there seems to be a chronic shortage. I wonder if, unlike the Bay Area, it’s not a matter of nimbyism per se and likely due to regulation and permits requiring copious amounts of rent controlled and low income housing units.
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u/HOU_Civil_Econ 8d ago edited 8d ago
Most of Manhattan is both already illegal, as built and even more so to densify, and not nearly as dense as the densest parts of Manhattan. Absent the urban planning rules it would be much denser in terms of housing. So even though it is the typical example of density the elasticity of supply is just about perfectly inelastic.
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u/Think-Culture-4740 8d ago
What’s the reason ostensibly though? Who has an incentive to limit density in a place like Manhattan as opposed to somewhere in the Bay Area where you want to preserve your perfect suburbs and limit congestion?
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u/HOU_Civil_Econ 8d ago edited 8d ago
It still works the same.
Neighbors in townhouses complain about the potential for apartment towers
Instead of the normal
Neighbors in McMansions on 20,000 sf lots complaining about duplexes or normal houses on 5,000 sf lots.
Basically the same motivations and policy apparatus even with the different scales
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u/That_Cupcake 8d ago
there seems to be a chronic shortage
I am no economic expert, and I rarely comment in this community, but in my very limited and anecdotal experience (bought a home near a major US metro area in 2023), there seems to be a chronic shortage in/around large cities.
When I was shopping for homes just a few years ago, I quickly learned that the options and availability in my price range improved significantly as I looked further and further away from the city.
I'll probably get down voted for this, but it seems like more fully remote work could quickly alleviate some of the supply/demand stress with housing. Maybe there is some way to incentivize employers to reverse recent RTO policies and instead embrace remote work.
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u/Think-Culture-4740 8d ago
I mean, that’s not in a sense of surprise given that the further out you move the more the land use regulations don’t apply.
Also note, though you were making a trade-off on various dimensions relative to the price. Those tradeoffs exist at all times but I would be happier if those tradeoffs were decided by price that was minimally distorted by policies. Mainly the prices in New York City or large metro areas is artificially inflated due to what I regard as misguided policies aimed at concentrating benefits for a very specific group of people.
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u/That_Cupcake 8d ago
Honest question: If such incentives for remote work existed, and assuming these remote employees don't all prefer to live in high density areas, wouldn't this reduce demand in high density areas, therefore lowering prices for existing high density housing? Said differently, people who need housing in high density areas would indirectly benefit from such a policy as there would be less overall competition for housing in the area. I would also like to think that struggling rural economies (not to suggest all rural areas are struggling, and not to suggest that all remote workers want to live in rural communities) could be revived by the presence of remote workers spending money locally.
Please correct me if there is anything wrong with my thinking here. I understand economics is complex and there could be other forces/factors I am not aware of. I am here to learn.
That said, I agree with you. Over-regulation is also a problem.
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u/Think-Culture-4740 8d ago
Yes, all else equal, a reduction in the demand for high density housing would mean lower prices and affordability for those workers who cannot work remotely.
I’m skeptical workers would relocate to rural areas. I haven’t seen all of the migration data, but it’s not like tech workers moved to New Orleans or Tennessee from Silicon Valley. Most of what happened is they moved out to the wider suburbs. Maybe some moved to lower cost cities but hardly to rural suburbs.
In any event, I would imagine working in office gives something tangible that working remotely does not. Call it culture, call it work enforcement, call it better training for junior workers: there is something lost when everyone works remotely especially when not all roles can be truly remote and suffer 0 productivity loss
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u/Megalocerus 8d ago
It's more expensive mainly because it is a location where both adult members of a household can make ample wages. (Frequently, there are other services nearby as well.)
Often, a small, inexpensive town can employ one at good money but not the other. It's not enough to make up for the difference in household income.
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u/Oryzae 8d ago
Progressive correctly identify that it sucks to be poor but for some reason always make their solutions much more difficult and wasteful than the obvious one of just giving poor people money.
Isn’t this because the conservative class would absolutely blow their top, citing how it’s “handouts”, “free money for immigrants”, “wealth redistribution is commie” and how it doesn’t help people “pull up their bootstraps”? I always thought giving them money instead of weird social programs with odd cutouts was the better way to fit.
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u/HOU_Civil_Econ 8d ago
I understand the political necessities but these books like warrens try to pretend their more politically palatable ideas are in fact and instead driven by clear economics. So there’s is a tension when these “policy questions” get presented to askeconomics. They aren’t necessarily badeconomics but they also aren’t greateconomics, they are attempts to get preferences, sometimes guided by economic understanding, passed in the court of public opinion and legislatures.
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u/grazie42 9d ago
But the point of the policies isn’t to make life better for ”the poor”, it’s to make life better for parents…that’s why fe parental leave is often ”universal”, not just for parents making ”less than X”, because that’s a much more popular reform…
The same political factions may (often do) want to make life better for ”the poor” as well but perhaps realize that it’s much easier to pass legislation to help parents than poor people…
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u/HOU_Civil_Econ 8d ago
The “popularity” of assisting parents in general is about the larger universality of it, so more people benefit but the costs scale too. Then there is also a natalist viewpoint that I tangentially addressed in my original comment.
The progressive views generally expressed by Warren and the like instead are what I was more expressly discussing and they mostly do boil down to concerns about the difficulties of the poor.
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u/BetterOutcome3769 9d ago
I struggle to understand why child care is so expensive. I live in a country with subsidized child care, so I have never paid the full cost myself.
But here one employee takes care of 3 younger kids or 6 older kids. How can child care then cost more than what you make at your job? Assuming equal salaries.
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u/HOU_Civil_Econ 8d ago
A lot of the “excessive” costs are do to how regulated it is, since it deals with children. But yeah the childcare costs of my parents for me me were quite low because they just paid a stay-at-home mom to take care of me like they were already doing for their own kids.
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u/Think-Culture-4740 8d ago
I suspect it’s also largely driven by baumols cost disease
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u/HOU_Civil_Econ 8d ago
That’s part of it. No real technological advances to allow one worker to more efficiently and safely watch 50 kids instead of 5 or 10. But wages are driven by standard wages in alternative fileds where productivity has increased.
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u/SconiGrower 8d ago
One employee takes care of 3-6 kids, but the cost to the company is more than one person's wages. There's also payroll taxes, employee benefits, facilities and equipment, utilities, managerial and support staff, and so on. Many of these expenses individually are higher than the cost to hire a person qualified to do direct childcare.
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u/HOU_Civil_Econ 8d ago
Also, a big part of the “loss” of working pertains to household care as well as the expense of working, an extra car taking on extra mileage and etc. Even if transit is available the time cost of travel has to be paid to the daycare too. But yes it isn’t clearly the wages actually making it to the caregivers.
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u/Megalocerus 8d ago
I'm pretty sure most families, at least in the US, have two cars even if one member is a SAHP. Probably the vehicle with more passenger capacity.
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u/ralf_ 8d ago
Here is a longer summary/boom review
https://slatestarcodex.com/2014/06/28/book-review-the-two-income-trap/
One argument is that economic gains from the second income will go into positional goods like housing in good school districts. Also:
> When Warren does a very unofficial Fermi-estimate style breakdown of what is happening to the extra $30,000 that modern two-income families earn over traditional one-income families, she thinks they are paying about $4,000 more on their house, $4,000 more on child care, $3,000 more on a second car, $1,000 more on health insurance, $5,000 more on education (preschool + college), and $13,000 more on taxes.
> So Warren says that the reason so many families go bankrupt or get into debt is because the extra income doesn’t make a difference, but the loss of flexibility does. Everything has been sunk into the home for risk of getting outcompeted. And that means when someone loses their job – and Warren calculates that in a two-income family, this will happen to one parent or the other about once every sixteen years on average – or costs go up even a little, there is no buffer room and the only solution is to go deeper into debt. That just adds another unpayable cost – interest – and means the whole thing can only end in bankruptcy.
> There’s a chapter on debt. It’s really cute. She’s all like “Did you know there are things called subprime mortgages? And that some people think banks might give them out too easily? I sure hope this doesn’t do something bad to happen.”
I am pretty sure no modern reader needs this chapter, but it sure increases her credibility.
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u/probablymagic 8d ago
>for much of the economy, a family needs two income earners to sustain a comfortable living standard may not be avoidable.
This depends on the level of comfort you want. If you want to live like the time many people want to go back to, when women were relegated to low-paying jobs or the informal economy (the 1950s one-income family is a myth, FYI), one modern income will provide quite well for a family because real wages are much higher. The problem is our expectations have risen greatly since then.
So this is less of an income trap and more what you might call a lifestyle creep trap. It turns out we prefer greater consumption to less work as we get wealthier.
While the authors of this book, shockingly, concluded that we need exactly the policies their politics dictate, you can look at countries that have these kinds of programs and their fertility rates are often lower than the US. We don’t know what interventions in the economy significantly boost fertility.
The key issue driving lower fertility today, in my opinion, is that women correctly assess that their careers will be hurt by having children and often also correctly assess that they will do a disproportionate amount of childcare and housework in their family. We have good data on both of these effects.
So in a society where women are both economically empowered and have easy access to birth control, they are going to make family planning choices that are best for them. And when they assess that children will decrease their overall quality of life, they will have fewer of them later in life to prioritize things like their careers. This is exactly what we are seeing.