Individual Welfare Analysis: A tale of consumption, time use and preference heterogeneity

How accurately does household income reflect the well-being of the individuals living within the household? Looking at household income does not take unequal consumption sharing within families, the value of time use (leisure and housework) and preference heterogeneity into account. I build a model of family decision-making and the marriage market which jointly captures these aspects and estimate the model based on British time use data. I use the estimated model to study poverty and inequality based on the individual-level Money Metric Welfare Index (MMWI). The main result is that only 59% of individuals who are poor in terms of the MMWI (a??welfare-poora??) are also income-poor, suggesting that the conventional focus on income misses a substantial fraction of the welfare poor. I find that accounting for unobserved preference heterogeneity is an important factor in assessing individual welfare. From an aggregate perspective, inequality within families accounts for 18% of overall welfare inequality, and heterogeneity in economies of scale across households account for 23% of welfare inequality. Finally, to illustrate the policy relevance of individual welfare measures, I study how minimum wage increases affect welfare-poverty in this framework. JEL classification: E21, I32, D13, D63