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Federal Reserve Bank of Minneapolis
Working Papers
Inferring Inequality with Home Production
Job Boerma
Loukas Karabarbounis
Abstract

We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and a home production technology. Accounting for home production amplifies welfare-based differences across households meaning that inequality is larger than we thought. Using the optimality condition that households allocate more consumption to their more productive sector, we infer that the dispersion in home productivity across households is roughly three times as large as the dispersion in their wages. There is little scope for home production to offset differences that originate in the market sector because productivity differences in the home sector are large and the time input in home production does not covary with consumption expenditures and wages in the cross section of households. We conclude that the optimal tax system should feature more progressivity taking into account home production.


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Job Boerma & Loukas Karabarbounis, Inferring Inequality with Home Production, Federal Reserve Bank of Minneapolis, Working Papers 746, 22 Dec 2017.
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Keywords: Home production; Labor supply; Consumption; Inequality
DOI: 10.21034/wp.746
For corrections, contact Jannelle Ruswick ()
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