The Role of Home Production and Heterogeneous Skills: the Labor Wedge Revisited

Abstract

Investigating the recent U.S. time use and expenditure data, I shed light on the importance of home production and skill heterogeneity in explaining the labor wedge once households make their consumption by investing time and money in non-market activities. In terms of magnitude, home production reduces most of the labor wedge without distinguishing skill heterogeneity. Yet, the role of skill heterogeneity reflects extensively in the skill composition and intensively in the skill premium. The labor wedge is cut down more significantly and consistently by the intensive margin than by the extensive margin. In terms of cyclicality, both home production and skill heterogeneity can reduce the countercyclicality of the labor wedge. Other than labor distortions, much of the leftover labor wedge is still driven by the above non-distortionary factors. Welfare losses in recessions and gains in booms can be small once either home production or skill heterogeneity restrains fluctuations.

Keywords: The Labor Wedge, Beckerian, Home Production, Heterogeneity in skills, Business Cycles

JEL Classification: D11, E21, E24, E32, H20, J22, J24