How Does Household Production Affect Earnings Inequality?

Although income inequality has been studied extensively, relatively little attention has been paid to the role of household production. Economic theory predicts that households with less money income will produce more goods at home. Thus extended income, which includes the value of household production, should be more equally distributed than money income. We find this to be true, but not for the reason predicted by theory. Virtually all of the decline in measured inequality, when moving from money income to extended income, is due to the addition of a large constant–the average value of household production–to money income. This result is robust to alternative assumptions that one might make when estimating the value of household production.