Does Home Production Drive Structural Transformation?

Abstract

Using new home production data for the United States, we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report two main findings. First, the estimation results show that home services have a lower income elasticity than market services. Second, the slowdown in home labor productivity, which started in the late 70s, is a key determinant of the rise of market services. Our counterfactual experiment shows that, without the slowdown, the share of market services would have been lower by 7.5 percent in 2010. (JEL D13, J24, L16)

The Drivers of Structural Change

“…In line with this view, a strand of the literature on structural change has explicitly introduced home production into analysis as a factor likely to account for part of the labor market shift towards services (e.g. Freeman and Schettkat, 2005;Ngai and Pissarides, 2008;Rogerson, 2008;Buera and Kaboski, 2012a,b;Barany and Siegel, 2018;Moro et al, 2017). As part of this literature, a number of studies have used multi-sector models to investigate the interactions between structural change, the marketization of home production and female work, and explain the evolution of gender outcomes in working hours and wages (e.g.…”

Sectoral shocks and home substitution

“…This section presents a model of structural change with a home production sector, first proposed in Moro et al (2017). There is a representative household and five types of good produced in this economy: four consumption goods (agriculture, manufacturing, market services, and home services) and one investment good.…”

“…and a perfectly competitive firm operating in the investment good sector with technology, Moro et al (2017) show that the problem of the household can be split into an inter-temporal problem and an intra-temporal problem and that the latter is the one driving structural transformation. Following their approach, we obtain the set of the sectoral shares equations:…”

“…First, we set the value of the parameter σ to zero, which governs the elasticity of substitution across agricultural good, manufacturing good, and aggregate services. Using the U.S. data from 1947 through 2010, Moro et al (2017) estimate the structural transformation model with a home sector and find that σ is close to zero. Similarly, Herrendorf, Rogerson, and Valentinyi (2013) Finally, γ is the parameter most relevant to this paper's exercise, which governs the elasticity of substitution between market and home services.…”

“…Therefore, the papers in the previous literature calibrate the model indirectly (Benhabib et al, 1991;Greenwood and Hercowitz, 1991;McGrattan et al, 1997). An exception is the recent paper by Moro et al (2017), who estimate a structural change model with home production by using new home production data developed in Bridgman (2016). With this model and its estimation at hand, we are able to study the reaction of consumption shares in the U.S. to a supply shock in manufacturing and to a supply shock in services.…”