American Economic Association

The Supply of Effort, the Measurement of Well-being, and the Dynamics of Improvement
Author(s): James N. Morgan
Source: The American Economic Review, Vol. 58, No. 2, Papers and Proceedings of the
Eightieth Annual Meeting of the American Economic Association (May, 1968), pp. 31-39
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1831794
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THE SUPPLY OF EFFORT, THE MEASUREMENT OF WELL-
BEING, AND THE DYNAMICS OF IMPROVEMENT

By JAMES N. MORGAN
University of Michigan
I want to do three things: attempt to reconcile some apparently con-
tradictory findings about the supply of labor, propose some improve-
ments that thereby need to be made in the way we measure a family's
economic status, and describe a research project we have underway that
may improve our understanding of why people stay poor, climb out of
poverty, or fall into it.
At a time when concern with human capital makes its utilization an
important issue and when studies of the labor force show its responsive-
ness to market conditions, our official definition of labor force and there-
fore unemployment have become increasingly narrow and stringent.
The few percent who qualify as unemployed last week in the official
statistics neither represent nor vary with the much larger numbers who
were unemployed or ill during the last year, or who were looking for
more work even though they had a full-time job. In the 1966 Survey of
Consumer Finances, 16 percent of family heads reported a week or more
lost from work by unemployment, and an equal number reported at
least some days lost by illness.' But these are losses from the regular
work, in a situation where many rely on overtime or extra work. So
when we asked people whether they would like to work more hours a
week, more than a third said yes, and among the uneducated and un-
skilled, more than half said that they would like more work. These
findings refer to 1965, which was a good year. The results were similar
for 1964.2 Even allowing for some exaggeration, there is still a large gap
between official estimates and the excess supply of labor. But the most
interesting fact is that the less money people make per hour the more
hours they report working, and the more extra work they want. This is
true even if we eliminate the self-employed, the very young, and the
very old. It becomes even more striking if we look at total hours of work
done, paid and unpaid, by all family members. The less the head earns
per hour, the more the whole family works. Half the family heads we
interview claim to be working more than forty hours a week. If we elim-
inate from consideration the very young, the very old, and the self-
employed, the average hours per year reported for 1964 were 2,200,
when 2,000 would represent fifty weeks at forty hours a week. But the
I George Ratona, et ci., 1966 Survey of Consumer Finances (Ann Arbor, Survey Research
Center, 1967), p. 134.
2 James Morgan, Ismail Sirageldin, and Nancy Baerwaldt, Productive A mericans (Ann
Arbor, Inst. for Soc. Res., 1966), pp. 429, 431, 93, 94, 13, 43. See, also, George Katona, et al.,
1966 Survey of Consumer Finances, p. 138.

31

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32 AMERICAN ECONOMIC ASSOCIATION

average starts near 2,500 for those with the lowest hourly earnings, and
decreases to 2,000 only when earnings get above $5.00 an hour. This
theme of more work at lower wages is reinforced when we include the
wife's work, the unpaid work of the family members, and the housework.
And since we are concerned with the amount that people would like to
work rather than the amount they do work, if we include the time ill or
unemployed as part of potential supply, the effect of low wages in
inducing a greater supply of labor is most dramatic.
How do we reconcile this with the trend for rising real wages to have
little depressing influence on aggregate labor force participation or
total work hours? We cannot argue simply that the income elasticity of
the demand for goods and services is greater than the income elasticity
of the demand for leisure, because that would be in conflict with the
cross-section finding. It cannot so easily be explained as a problem of
errors in variables and short-run change, as Friedman did with time
series and cross-section discrepancies in the consumption function, be-
cause the short-run changes are in availability of jobs, not in wage rates.
And indeed, when we count the total productive effort of the family, in-
cluding the wife's work for money and everyone's unpaid productive
efforts, the same backward sloping supply curve of effort appears in the
cross-section data. It seems more sensible to argue that there are socially
established standards of what an acceptable income level is, as the De-
partment of Labor keeps telling us, and that people strive to get to them,
by working harder if their wage rates are low. And these standards rise
as the average income level rises.
Indeed, a similar kind of threshold or standard seems to exist in the
case of retirement. We have a recent study on early retirement plans
which seems to show that unless a person can count on a cash retirement
income of $4,000 a year or more he is most unlikely to plan to retire
early. Of course other constraints such as dependent children or unpaid
mortgages remaining after age 60 restrain some others, but it seems
likely that income standards exist, and that they will rise with increasing
affluence in the future.
Another bit of evidence on income standards is that today a husband's
income must be substantial if it is to discourage his wife from working.
There is a substantial drop in the proportion of wives working only
when the husband's income gets above $7,500. Where the wife is young,
with little to keep her home, or alternatively where there are several
children to feed so they need the money, the drop in labor force parti-
cipation of wives comes only when the husband's income exceeds
$10,000.2 There are some married professional women who will work
whatever their husband's income, but they are still a small minority of
the wives.

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 BEHAVIORAL AND ECOLOGICAL ECONOMICS 33

Of course we professionals like to point to how hard we ourselves work

at relatively high wages, and the backward sloping supply curve does
reverse its direction at the very top. Indeed, we have found that the
very highest income people are so driven to work, but by forces other
than the monetary rewards, that they are deterred little if at all by the
bite of income taxes on those rewards.3 But although they are important
they are a small part of the total population. Our studies of early retire-
ment also indicate that some of the highest paid auto workers delay re-
tirement, even though the main finding remains that it is those with the
most seniority and the best retirement income who are retiring early
under an early retirement plan.
Whatever we may conclude about the responsiveness of labor supply
to economic incentives in the short run or the long, there are vast differ-
ences between people in their hours of work, particularly if we take the
family as a unit. For family heads such things as extra jobs or overtime
account for far more of the interpersonal differences in hours than do
illness or unemployment. The large and growing number of working
wives, predominantly younger wives without preschool children, ac-
counts for still more of the large differences. And if we count the un-
paid work around the house, still another source of variation, partially
offsetting the last, appears. This brings us to point two: the need for
improvements in measures of how well-off families are-improvements
that take account of the work done and the leisure that remains.

The Measurement of Well-offness

Some years ago we used data from a national sample to derive mea-
sures of how well off families were; these measures took account of the
unit, of nonmoney incomes, of income taxes, and of the varying needs
of families.4 In the recent attempts to measure poverty more precisely,
reliance has been on money incomes relative to a set of standards based
on family size-the famous Orshansky levels.5 They can be summarized
as calling for a base amount of $1,000 plus $500 per person, with some
truncation for very large families and a reduction for farm families.
Because family income data include some transfers, they are not
suitable for measures of the way a market system distributes earned
incomes, and as measures of how well off families are, they are inade-
quate for a whole set of reasons: (1) They exclude nonmoney transfers
(free food, clothes, housing, and subsidized medical care), and irregular

" Robin Barlow, Harvey Brazer, and James Morgan, The Economic Behavior of the Affluent
(Brookings Institution, 1966).
4James Morgan, Martin David, Wilbur Cohen and Harvey Brazer, Income and Wdfare in
the Utnited States (McGraw-Hill, 1962).
6 Mollie Orshansky, "Counting the Poor: Another Look at the Poverty Profile," Soc. Sec.
Bul, 28, (Jan, 1965) pp. 3-29.

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34 AMERICAN ECONOMIC ASSOCIATION

money transfers. And they do not deduct such out-transfers as pay-

ments of income taxes, alimony, or charitable contributions. (2) They
exclude nonmoney income from assets (imputed returns on investments
in houses, cars, durables) and realized or unrealized capital gains on
these or on financial assets. (3) And they exclude nonmoney income
from unpaid work (housework, do-it-yourself projects, and contributing
time by helping others or by working for charitable organizations). It is
not difficult to assign dollar values to the nonmoney incomes from assets
by selecting some rate of return on the net equity. In the case of the
value of unpaid work there are several possibilities.
In our earlier study we simply asked people how much money they
saved by their home production. In a more recent study, where we in-
cluded housework and charitable work as well, we tried a number of
dollar values per hour of time, including the individual's hourly earning
rate.6 We can argue that anyone free to choose between paid and unpaid
work probably values his unpaid work at the same hourly rate as his
paid work at the margin. So for measuring its value to the family, we
might use such a measure. However, we might balk at including in the
national output that part of the value of a man's church work or work
in the garden that was a psychic return, valuable only to the doer.
There remain two other less important problems. First, the use of the
family as a unit ignores the fact that some 17 percent of family units
provide housing for adult relatives despite their overwhelming dislike
of such doubling up. A great deal of private voluntary aid to the poor
still takes the form of aid to relatives, and most of it is done by providing
them with food and housing. In our earlier book, Income and Welfare in
the United States, we arbitrarily separated these doubled-up families into
their component nuclear units, called "adult units," and showed the
impact of this on estimates of inequality. Indeed, discussions of the pos-
sible outlays involved in negative income taxes or other forms of guaran-
teed minimum incomes commonly ignore the fact that if one freely al-
lowed undoubling, the total number of potential recipients would nearly
double.
Second, we must allow for the emotional attachments the aged have
to their own homes-attachments that produce expenditure dispropor-
tionality and inefficiencies in consumption. Ignoring the imputed rent
clearly makes these people look worse off than they are. But including
it at full value, as we did in our 1962 study, probably makes them look
better off than they are. They cannot, after all, buy food or medical care
with that imputed rent. Yet they would rather starve than move. The
only solution to this impasse may be to evaluate people's incomes and
their needs net of housing.

6 James Morgan, el al., Productive A mericans; and Tsmail Sirageldin, Non-Market Compo-
nents of National Income (Univ. of Michig,an, Ph. D. thesis, 1967).

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 BEHAVIORAL AND ECOLOGICAL ECONOMICS 35

But perhaps the main problem with measures of economic status-a

problem which applies to most of the work to date-is that these mea-
sures take no account of the work done to earn the income, or of the
leisure left to enjoy it. Gary Becker has pointed out that consumption
requires both time and money.7 When we notice the vast differences in
the amount of time people are devoting to earning money or to saving
money by doing various productive but unpaid tasks, we realize that we
must develop some measures of well-offness that take account of these
differences.
Families vary in size, and a few preschool children can make a lot of
work; so reported hours of housework vary from less than 240 to more
than 4,500. The average bachelor reported 408 hours and the average
wife 2,053. If we look at the total of hours of productive activity done by
families, it varies from less than 1,000 per year to more than 10,000! We
have estimated that including the money value of the unpaid work of
American families-housework and work for charity as well as do-it-
yourself projects--would increase the country's estimated gross national
product by the more than one-third.8

A Proposed Measure

How can we develop a measure that combines such disparate things

as money and nonmoney income, family size and need, work effort and
leisure? Two manipulations will allow us to develop such a measure.
First, while components measured in different units cannot be added or
subtracted, they can be multiplied or divided.
Hence we can develop a reasonably good index of the adequacy of the
family's command over goods and services by adding money and non-
money incomes, deducting taxes, and dividing by some measure of the
family need. Even if the measure of need is at the wrong level, it still
adjusts for differences in family size and structure.
And we can develop an index of the amount of leisure enjoyed if we
take twenty-four hours per person, deduct twelve hours a day for sleep
and maintenance, deduct work time, deduct time of illness or unem-
ployment, which is not enjoyable, and divide the remaining "enjoyed
leisure" by the number ot adults.
We now have two components of welfare: one an index of the ade-
quacy of the family's command over resources and the other an index of
the amount of enjoyable leisure left to the family. (We might want to
adjust the latter further for those who say they want more or less work
than was available, even if they were not unemployed or ill.)
We then proceed to propose that indifference curves between resources

Gary Becker, "On the Economics of Time" (paper presented at Econometric Society
ameMting, 1963).
1 James Morgan, et al., Productive Antericans, p. 5., 185ff.

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36 AMEERICAN ECONOMIC ASSOCIATION

and leisure can be approximated by rectangular hyperbolas within the

relevant range. Therefore an adequate index of family well-offness is the
algebraic product of the two indexes. We can multiply them together
without worrying that they are in different, and already complicated,
units.
There has been a good deal of talk lately about social indicators. It
seems to me that a prime candidate for such an indicator would be re-
peated measurements of such an index of well-offness based on repre-
sentative national samples. Instead of merely counting the number of
poor-defined as those with money income below the Orshansky level-
we might rather provide a more meaningful measure. It would require
asking of each family of a sample, its money income, its ecluity in service-
producing assets like homes, its total hours of paid and unpaid work, its
illness and unemployment experience over the past year, and its desires
for more or less work.
If we then wanted a single trend figure of the extent of poverty in
America, I should propose it be the proportion of the people in families
where the family index of well-offness is less than a third of the national
average of that index. We need to count people, not families, even
though it is the family condition that defines poverty. By Orshansky
definitions, for instance, 40 percent of the poor people in America are
children. The fraction used for cut-off is arbitrary, but a lot less arbi-
trary than a fixed dollar boundary. Under such a definition we not only
take care of leisure as well as goods and services, but we stand a chance
of accounting for a total abolition of poverty. It is true that there will
always be people below the average, but it need not be forever true that
there are people below a third of the average.
We have already spelled out in some detail elsewhere what happens
to estimates of inequality if one changes the unit of analysis or makes
the measure of control over resources more comprehensive or makes ad-
justments for differences in needs.9 Undoubling families by separating
them into adult units uncovers some poverty hidden by doubling up
and produces larger Gini coefficients. The inclusion of imputed and
other nonmoney incomes improves the measured status of the aged and
some other people with low money incomes and reduces inequality esti-
mates. Taking accounlt of family size and structure, say by dividing
incomes by some estimate of the needs of a family of that type, pro-
duces lower measures of inequality, because many low-income families
are small and many larger families are headed by a middle-aged person
at his earning peak.
But interestingly enough and in spite of the fact that lower hourly
I James Morgan, "The Anatomy of Income Distribution," Rev, of Econ. and Statis., Aug.,
1962.

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 BEHAVIORAL AND ECOLOGICAL ECONOMICS 37

earnings are associated with longer hours of work, taking account of the
total work hours of the family, or rather of its remaining leisure, does not
increase an overall estimate of inequality. Families that are better off
actually tend to put in a large amount of work and to have slightly less
leisure. The differences are small and not significant. The reason is
probably that both high total family resources relative to need and
ample leisure left to enjoy go along with small families, particularly for
married couples with no children. Also, older retired people work less,
and working wives produce the main increases in both family income
and family work.
Some people will object to counting only the money returns from
work and to counting leisure as worth something, on the grounds that
some people enjoy their work and some do not enjoy their leisure. But
all we really need to do is to assume that the last hour of leisure given up
was worth something; namely, what the work pays plus any direct
satisfaction the last hour of work gives. And it seems likely that for most
people the last hour of work for money produces relatively little direct
satisfaction. There may well be consumer surpluses for the intramarginal
units of both work and leisure; of course. Our indifference curve index
approach incorporates the surpluses too.
It seems too bad, at a time when more and more attention is being
given to problems of poverty and inequality, that we rely upon an indi-
cator of unemployment, recently tightened up one more notch, that is a
small tip of a variable-sized iceberg, ignoring the vast fluctuations in
extra work, and in the desires for more work than is available. And at
the same time we continue to collect and talk about data on dollar
family income that are half after-transfers (they include some transfers
and not others) and half adequate (they include only regular dollar
flows) and half-baked because they take no account of how many people
depend on the income or on how long they work to get it.

The Dynamics of Improvement

With an adequate measure of the well-off ness of a family, changes can
come in the family position if there are changes in: money income; non-
money income from assets; nonmoney income from work; changes in
family size or composition; changes in total work hours; extensive illness
or unemployment that changes the meaning of leisure. At the border of
unmeasurability there may also be changes in the extent to which people
enjoy either their work or their leisure.
Any of these changes can come about exogenously, as business condi-
tions change, or as illness, accident, or unemployment occur. Or they
can derive from something the family does. We are starting a panel
reinterview study in cooperation with the U.S. Office of Economic Op-

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38 AMERICAN ECONOMIC ASSOCIATION

portunity that will attempt to understand the process by which families'

economic status changes, with emphasis on changes in families near the
poverty level.
The basic theoretical model behind the study posits that change in
economic status of a family will cause changes in their attitudes, expec-
tations, and beliefs about what is possible. Changes in these psycholo-
gical variables will in turn cause changes in the family's economic be-
havior, thus affecting what the family does to increase its income or to
use its income more efficiently. A family may try to increase its income
by searching for new jobs or new sources of extra income or by working
longer hours. It may use its income more efficiently by shopping care-
fully, planning ahead, avoiding or insuring risks, or restricting the
number of children. These changes in behavior patterns are then expec-
ted to create further changes in the family's economic status.
In other words, we think there is a dynamic recursive system in which
the family's behavior, its attitudes and aspirations, and its changes in
economic status-all influence one another. But each of them can also
be affected by outside events. A new job or a retraining opportunity
may lead to an increase in family income, which may allow the family
to save money, plan ahead better, pay off some debt, and then use their
money more efficiently. And having been encouraged, the husbaind
might seek a still better job or a second job.
On the other hand, there may be patterns of reaction that cause op-
portunities to be missed. A financial windfall may be wasted in celebra-
tion. There may even be cumulative downward spirals, each step rein-
forcing the last with difficulties leadinig to nonadaptive attitude changes,
discouragement, apathy, short-time horizons, hostility, or aggression.
The result caln be a changed behavior pattern that exacerbates the
difficulties and even also affects the next generation by altering the way
people raise their families. What is often seen as a lack of imagination,
initiative, or enterprise on the part of the poor may well be the result of
long periods of frustration and the resulting hopelessness and apathy.
There will also be families which stay poor because of circumstances
over which they have no control, because of situations in which nothing
they could have done would have helped much. The study we are
starting with the Office of Economic Opportunity should provide esti-
mates of the number of such families. They are certainly deserving of
regular financial help with a minimum of censure or interference.
While the basic model of the study is a dynamic one and while we
shall be able over a period of years to see whether economic status, atti-
tudes, and behavior patterns move together, we shall not be able always
to specify the timing nor be able to infer the direction of causation in

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 BEHAVIORAL AND ECOLOGICAL ECONOMICS 39

this chicken-egg sequence. But at least we shall be studying the dy-

namics of success rather than the statics of failure.
In the case of some kinds of findings the policy implications of such a
study are clear. If we find that a large number of those who stay poor
over many years would have stayed poor no matter what they did, then
the argument for negative income tat, or guaranteed minimum income
without requirements as to behavior, residence, relatives, or "no-
savings" becomes cogent. If we find certain kinds of attitudes and per-
ceptions more adaptive than others, we can ask how to transmit them
to more of the poor. If we discover certain common kinds of behavior
that increase difficulties, such as refusing to try a job in a new area, for
instance, or sheer unawareness of opportunities or disbelief in the
relevance of new paths to success, perhaps an educational program can
reduce the tendency to act that way.

Conclusion

To summarize, we need better conceptual precision in our measures

of poverty and inequality more than we need larger masses of statistics.
The trend toward more and more precision in measuring the wrong
things needs to be reversed. A prime candidate for a better social indica-
tor than unemployment or family income is a measure of the economic
status of families that takes account of the main nonmoney items and of
the leisure left to enjoy what they earn. We have suggested some ways of
simplifying such indicators.
And then we need to understand better the dynamic processes by
which the economic status of families change. Economists have fairly
recently come to the realization that in the United States family income
is not an exogenous variable in a consumption function, but something
some families can change.10 We need to know to what extent families
really do control their own destinies, and the process by which their own
attitudes and aspirations and behavior patterns interact with their
economic status. Out of the findings of such a study, we should be able to
develop a better national policy to eliminate dependency where we can
but, in any case, to eliminate poverty.

10 Dan Suits, "The Determinants of Consumer Expenditures, a Review of Present Knowl-

edge," in Impacts of Monetary Policy (Prentice-Hall, 1963).

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