WHILE driving through rural South Carolina recently, I was surprised to find that nearly every home I passed had a sign advertising some cottage industry. Each offered a range of services from “small welding projects” to “bikini waxes” (though no one I surveyed had ever patronised that particular business). These businesses were not necessarily limited to modest homes; it spanned a spectrum of income levels.

Cottage industry has traditionally been a building block of economic development. In industrialised countries it was the first form of manufacturing and paved the way for the industrial revolution. Home production has traditionally been common to low income, less skilled workers and its popularity counter cyclical. When the economy provides less jobs workers become more likely to engage in home production.

In developed economies home production is generally inefficient. Take the at home bikini waxer, whom I assume is female. Performing bikini waxes from her home, on a back country road, limits the scale of her business. If she set up a commercial shop in a central location she would attract more customers and have the space to employ others. Working at home saves overhead, but limits the scope of her production; the increased volume means commercial waxer will be able to charge less and serve more customers.

But does this hold in the internet era? For waxing, yes. But for other home production businesses, not so much. Through forums such as ebay, their client base has been extended to the global community.

It is still unclear what the impact of this will be on the labour market. The number of workers who claimed to be engaging in home self employment, as of 2003, still seemed to vary with the business cycle. This may not reflect the scope of the industry, because many home entrepreneurs have their home business to supplement other income. But it does seem to be the case that women and the elderly have become more likely to become self-employed.

It will be interesting to see what the impact on the labour market will be. On the one hand cottage industry provides income to those who normally may not work such as retirees, and women engaged full time in child care. It also encourages more entrepreneurial activity which can spur growth. On the other hand, workers who forgo other employment opportunities will not receive the level of benefits they would get with a traditional employer; and economically, their labour will not reap the productivity benefits of scale and network effects.