Preferences or Prices? Differences in Home vs Market Production in Europe and the US

Compared to Americans, Europeans allocate less time to market work, and more time to home production and leisure. However, it has been challenging to establish whether this is due to differences in market prices, broadly construed (e.g., taxes and minimum wages), or whether we need to invoke differences in norms and preferences. The key challenge is the lack of appropriate variation in the data. While we observe differences in the relative prices of different forms of home production, long run price elasticities are difficult to estimate, since we lack exogenous price variations that are large and persistent. In this paper, we exploit a unique Swedish policy to estimate the long-run demand response to a change in the price of home production. The policy provided a permanent 50% wage subsidy for household services, which brought the relative price of cleaning services in Sweden in line with US levels. Our analysis compares the evolution of the demand for cleaning services over time in Sweden compared to that in neighboring countries. We make a number of points. First, demand adjustment is very gradual; if we stop our analysis after a couple of years, we only find a modest demand response. However, with a longer time horizon of ten years, we find a very large increase in the demand for cleaning services, corresponding to an estimated elasticity of around 4. After the full adjustment, Swedish consumption patterns of cleaning services are close to those in the US. Thus, our finding supports that prices might explain a large share of the transatlantic differences in home versus market production. Furthermore, our results support that habits or other adjustment frictions make it important to distinguish between the short-run and long-run effects of price changes when it comes to policies that affect household behavior.