This paper argues that the home, or nonmarket, sector is empirically large,
whether measured in terms of the time devoted to household production
activities or in terms of the value of home produced output. We also argue
that there may be a good deal of substitutability between the market and
nonmarket sectors, and that this may be an important missing element in
existing macroeconomic models. We pursue this within a framework that labor
economists have studied for some time. Symmetrically with the market,
household production uses labor and capital to produce a nonmarket
consumption good according to a possibly stochastic technology. We show any
model with home production is observationally equivalent to another model
without home production, but with different preferences. However, for a
given set of preferences, incorporating household production can
dramatically change the nature and the interpretation of several
macroeconomic phenomena. As an example, we show that it is possible to have
involuntary unemployment and normal leisure at the same time in models
with home production, something that cannot arise in models without it. As
another example, we discuss how home production affects the interpretation
of models with consumer durables.
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