How Does Household Production Affect Measured Income Inequality?

32 Pages Posted: 17 Mar 2009

See all articles by Harley Frazis

Harley Frazis

U.S. Bureau of Labor Statistics

Jay Stewart

Bureau of Labor Statistics; IZA Institute of Labor Economics

Abstract

Although income inequality has been studied extensively, relatively little attention has been paid to the role of household production. Economic theory predicts that households with less money income will produce more goods at home. Thus extended income, which includes the value of household production, should be more equally distributed than money income. Previous studies have found this to be the case and have speculated that the more-equal distribution of extended income is due to the weak correlation between money income and household production income. We also find that extended income is more equally distributed than money income. The main contribution of our paper is that we identify the reason for this result. Our sensitivity analysis indicates that virtually all of the decline in measured inequality when moving from money income to extended income is due to the addition of a large constant - the average value of household production - to money income and that measured inequality is insensitive to the correlation between money and household production income. The practical importance of this result is that estimates of extended income inequality are robust to imputation procedures and that researchers can obtain accurate estimates of trends by simply using mean values of household production income.

Keywords: inequality, household production

JEL Classification: D31, J22, D63

Suggested Citation

Frazis, Harley and Stewart, Jay, How Does Household Production Affect Measured Income Inequality?. IZA Discussion Paper No. 4048. Available at SSRN: https://ssrn.com/abstract=1359984

Harley Frazis (Contact Author)

U.S. Bureau of Labor Statistics ( email )

2 Massachusetts Avenue, NE
DC
United States

Jay Stewart

Bureau of Labor Statistics ( email )

2 Massachusetts Avenue, NE
Washington, DC 20212
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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