Home Production and Structural Transformation

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When economies develop and grow richer, they typically undergo large scale sectoral reallocations of economic resources such as employment, value added, and expenditures. These reallocations have been shown to lead to a secular decline in the relative size of the agriculture sector, a hump-shaped evolution of manufacturing and a gradual expansion of the service sector. This process of sectoral reallocation is commonly referred to as structural transformation. A recent and growing literature has devoted significant efforts to investigating the causes of structural transformation and its consequences for economic outcomes at the individual and the aggregate level. However, this literature generally abstracts from the consumption produced by individuals at home for own use. This so-called home production has been shown to constitute a sizable economic activity and the reason why it may matter for structural transformation is because the services produced at home generally are closely substitutable with market-produced services. Moreover, it has been argued that that rising opportunity costs of home work during the last decades have induced households in industrialized countries to gradually replace their home-produced services by market-produced services, which is a process called marketization. The main objective of this project is to investigate empirically and quantitatively the driving forces of structural transformation and to assess the role of home production and marketization for the process of sectoral allocations. A specific goal of the analysis is to show the importance of modelling intra-household decision making for understanding the data on structural transformation and the allocation of production between home and market sectors. Another goal is to explore the feedback effect of structural transformation on household-level outcomes such as family formation, child bearing and the allocation of home work among household members.