Labor Market Participation, Home Production and the Demand for Unskilled Labor

In the course of increasing labor market participation, especially among women, and rising wealth, one observes an increase in outsourcing of home production. Cleaning ladies and house maids, but also restaurants, garages and kindergartens, take over work that has formerly been done by the people themselves. The process creates new jobs for unskilled workers in the service sector. Against this background, Melanie Lührmann and Matthias Weiss have examined the effects of prolonging the number of working hours per week or the impact of increasing labour market participation on the demand for unskilled labor and unemployment.

The researchers developed and tested a general equilibrium model in which an increase in labor supply leads to a fall in unemployment. They considered three margins at which labor supply can change: the number of working hours per week, retirement age, and labor force participation. An increase in labor supply at either margin has two direct effects: People have higher incomes and less (leisure) time. Higher incomes lead to higher consumption expenditures and they argued that this increase is not proportional across different categories of consumer demand. As consumers have less time, they will disproportionately increase demand for goods and services that they have so far produced on their own. Examples for this outsourcing of homeproducible goods and services are house cleaning, food preparation, child care, repairs at home, ironing, lawn mowing, fixing bicycles, etc. Consumer demand thus shifts towards goods and services that everyone can in principle produce on their own. These goods and services are mostly produced/supplied by unskilled workers. Consumer demand shifts towards unskill-intensive goods and therefore, labor demand shifts towards unskilled labor. Given the concentration of unemployment at unskilled labor, an increase in the relative demand for unskilled labor has positive employment effects.

The theoretical model has several testable implications:

1. In times and countries, where labor supply is high, unemployment should be low.
2. Households that supply more labor should spend less time on "home production".
3. Households that supply more labor should spend more on goods and services that substitute for "home production".

We test conclusion 1 for 23 OECD countries for the time period 1980 - 2003. Conclusions 2 and 3 are tested using Time Use data of 4000 German households. The results corroborate all three conclusions from the theoretical model.

Market Work, Home Production, Consumer Demand and Unemployment among the Unskilled

MEA Discussion Paper: 101-06 Melanie Lührmann, Matthias Weiss