Inferring the Labor Wedge with Home Production: the Role of Skills

I document skill heterogeneity in hours and expenditures on market work, home production, and leisure from 2003 to 2018 by exploiting the American Time Use Survey (ATUS) and the Consumer Expenditures Survey (CEX). The purpose is to infer and explain the size and cyclicality of the labor wedge if three margins - the Beckerian preference, home production, and heterogeneous skills are added into the preference system. In regard to size, I find that with home production, the model can infer about twice as much the labor wedge as the Baseline model, and another 27% more can be further inferred once I am able to identify the skill heterogeneity. The further investigation affirms that the role of skill premium is to absorb the labor wedge by one-third. In regard to cyclicality, home production reduces the countercyclicality of the labor wedge by 13%, and the heterogeneity in skills cuts it down by 14% more. Likewise, the skill premium accounts for 8.2% countercyclicality of the labor wedge. In general, the skill composition effect does, however, not shape the labor wedge very much.