Inferring the Labor Wedge with Home Production: The Role of Skills

Abstract

The paper documents skill heterogeneity in hours and expenditures on market work, home production, and leisure between 2003 to 2018 by using the American Time Use Survey (ATUS) and the Consumer Expenditures Survey (CEX). The purpose is to infer the labor wedge by adding three margins cumulatively that are the Beckerian preference, home production, and heterogeneous skills. Given the identified structural parameters, the first finding is that as home production is introduced, the year-average size of the labor wedge rises by 2.84 log points, and the incorporation of heterogeneous skills further lifts by 1.48 log points. Secondly, the skill heterogeneity in market and time inputs tends to escalate the size of the labor wedge whereas the skill composition and skill premium tend to absorb the inferred labor wedge with the latter being much more significant. Lastly, home production reduces the countercyclicality of the labor wedge by 13%, and the further consideration of heterogeneity in skills cuts it down by 14% more.