Market Work, Home Production, Consumer Demand and Unemployment Among the Unskilled

Abstract

This paper introduces a new argument into the theoretical literature on labor market effects of changes in working hours and labor force participation. We advance a general equilibrium model in which increased labor supply reduces unskilled unemployment via consumer demand: longer work hours and higher labor force participation imply higher incomes and less (leisure) time. In consequence, home production is reduced in favor of outsourcing domestic tasks to the market, shifting consumer demand toward unskill-intensive goods. Relative demand for unskilled labor rises and unemployment falls. Finally, we provide empirical support for the basic mechanisms of our model for Germany.

Keywords: Working Time Reduction, Labor Force Participation, Low Skill Unemployment, Home Production, Time Use

JEL Classification: J22, J23, E21, E24