Home production, consumption, and labor supply.

• Author: Aguiar, Mark
• Position: Research Summaries

The way that consumers allocate consumption expenditures over the life cycle, or across states of nature, is a fundamental concern in economics. However, as Reid, (1) Mincer, (2) and Becker (3) noted in seminal contributions, consumption can be viewed as the output of "home production," which uses inputs purchased in the market as well as non-market time. This implies that the allocation of time and resources via market transactions cannot be understood fully without also understanding how time is allocated outside of the market. As the relative price of their time falls, individuals will substitute away from market expenditures and use more of their own time to produce consumption commodities. Since an individual's opportunity cost of time has a direct bearing on her total cost of consumption, market expenditures may be a poor proxy for actual consumption.

The opportunity cost of allocating more time to market work is having less time available for non-market activities. To understand shifts in labor market activity, which are reflected in market hours, it is important to know whether the alternative non-market activities are substitutes for or complements to time devoted to market activities. In a series of papers, we study the role of the allocation of non-market time in determining both the behavior of market expenditures over the life cycle and the changing patterns of market hours during the last four decades.

Framework

We adopt Becker's modeling framework, in which the consumption commodities that enter the utility function are produced with a combination of time and market goods. When time and market goods are good substitutes in production, then we consider the time spent as home production, but when the two are poor substitutes, we consider the time leisure. For example, "television watching" and "eating a meal" are both consumption goods. Both combine individual time with market expenditures. However, television watching time and market goods (the television itself, a cable subscription, and so on) will likely be complements. It is relatively hard to economize on one's television watching time by increasing market purchases. In the meal example, however, time (preparation, clean up, and so on) and goods (groceries, kitchen durables, and the like) are substitutes. The substitutability results from the fact that individuals have the option of purchasing food prepared by others. How market expenditures evolve over the life cycle, and how home production evolves over time, thus depend on whether time and expenditures are complements (as in the first example) or substitutes (as in the second).

This framework is useful for understanding why food expenditure falls at retirement, while non-durable entertainment expenditure increases at the same time. It also can shed light on why the increase in women's labor force participation since the 1960s was associated with an increase in women's leisure time.

Home Production and the Retirement Consumption Puzzle

We first use this framework to address the so called "retirement consumption puzzle." (4) Previous authors have documented a dramatic decline in food expenditures as households transition from working to retirement. The decline has been interpreted as evidence that the average household receives adverse news about its lifetime resources upon retirement (5) or that households do not plan sufficiently for retirement (6). However, we show that the decline in expenditure is matched by an equally dramatic rise in the time spent shopping for and preparing meals. A decline in...