DP12393 On the Allocation of Time - A Quantitative Analysis of the Roles of Taxes and Productivities

Author(s): Georg Duernecker, Berthold Herrendorf
Publication Date: October 2017
Keyword(s): Household production, income tax, labor productivity, leisure
JEL(s): E1, J4
Programme Areas: Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12393

Basic theory suggests that increases in labor-income taxes induce people to substitute household production for market work. Time-use surveys for 12 OECD countries during 1970-2010, however, show that instead people substituted leisure for market work. To understand why this happened, we carefully measure the labor productivity of household production and find that it grew strongly in many countries of our sample. Employing a calibrated model of household production, we show that strong growth in the labor productivity of household production implies that leisure absorbs the reductions in market work after labor-income tax increases.