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Luxuries, Necessities, and the Allocation of Time

Author

Listed:
  • Lei Fang

    (Federal Reserve Bank of Atlanta)

  • Anne Hannusch

    (Department of Economics, University of Mannheim)

  • Pedro Silos

    (Department of Economics, Temple University)

Abstract

We develop and estimate a novel framework for thinking about the allocation of time by revisiting Becker’s notion that the opportunity cost of time is determined by activities other than market work. These activities are produced by combining time and goods. We document that households engage in two types of activities: luxuries and necessities. An increasing share of time and goods is allocated to luxuries as wages rise. The opposite is true for necessities. To rationalize these facts, we estimate a model with non-homothetic preferences in time use. We use the model to study the effect of wage changes and price changes on hours worked, the allocation of time and goods to activities, and welfare. Our results show that households compensate rises in activity prices or reductions in wages by shifting fromluxuries to necessities. Since activities are highly substitutable and the activity production inputs time and goods can be substituted to a lesser extent, households are able to absorb some of the reduction in income by shifting to time-intensive necessities. As a result, household welfare declines less than income. We argue that these findings have novel implications for thinking about cross-sectional differences in hours worked and the relation between income and welfare inequality.

Suggested Citation

  • Lei Fang & Anne Hannusch & Pedro Silos, 2021. "Luxuries, Necessities, and the Allocation of Time," DETU Working Papers 2102, Department of Economics, Temple University.
  • Handle: RePEc:tem:wpaper:2102
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    File URL: http://www.cla.temple.edu/RePEc/documents/DETU_21_02.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Time Allocation; Consumption Expenditures; Elasticity of Substitution; Labor Supply; Non-homothetic Preferences;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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