Luxuries, Necessities, and the Allocation of Time

Lei Fang, Anne Hannusch () and Pedro Silos
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Anne Hannusch: Department of Economics, University of Mannheim

No 2102, DETU Working Papers from 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.

Keywords: Time Allocation; Consumption Expenditures; Elasticity of Substitution; Labor Supply; Non-homothetic Preferences (search for similar items in EconPapers)
JEL-codes: D11 E21 J22 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-isf and nep-mac
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http://www.cla.temple.edu/RePEc/documents/DETU_21_02.pdf First version, 2021 (application/pdf)

Related works:
Working Paper: Luxuries, Necessities, and the Allocation of Time (2022)
Working Paper: Luxuries, Necessities, and the Allocation of Time (2021)
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