Working Paper

Luxuries, Necessities, and the Allocation of Time

Abstract: Households enjoy utility from activities that require a combination of time and goods. We classify activities into two types: luxuries and necessities. Luxuries (necessities) are activities for which time and expenditure shares rise (decline) with income. We develop and estimate a model with nonhomothetic preferences and find that time and goods are substitutable in producing activities. Activities are also substitutable among themselves. Hence, wage and price changes cause large reallocations of time and expenditures across activities. This effect is quantitatively important for welfare inequality. Since 2003, the rise in the price of leisure luxuries has reduced welfare inequality while the rise in wage dispersion has increased it.

Keywords: time allocation; consumption expenditures; luxuries; necessities; activity production; inequality;

JEL Classification: J22; E21; D11;

https://doi.org/10.29338/wp2021-28

Status: Published in 2021

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2021-12-28

Number: 2021-28

Note: The authors thank audiences at various conferences and universities for helpful comments. They want to especially thank Alex Bick, Yongsung Chang, Nicola Fuchs-Schundeln, Nezih Guner, Loukas Karabarbounis, Karen Kopecky, Dirk Krueger, Rachel Ngai, Tim Obermeier, B. Ravikumar, Richard Rogerson, Chris Tonetti, and Gianluca Violante for feedback at all stages of this project. The views represented here are those of the authors and do not represent the views of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the Federal Reserve Board of Governors. Hannusch gratefully acknowledges financial support from the German Research Foundation (DFG) through CRC TR 224 (project A03).