Abstract

We revisit the causes, welfare consequences, and policy implications of the dispersion in households' labor market outcomes using a model with uninsurable risk, incomplete asset markets, and home production. Accounting for home production amplifies welfare-based differences across households meaning that inequality in standards of living is larger than we thought. Home production does not offset differences that originate in the market sector because hours working at home do not covary with consumption and wages in the cross section of households and there are significant production efficiency differences in the home sector. The optimal tax system should feature more progressivity taking into account home production.