Human capital, household production and prices in models of family labour supply

The conventional approach to modelling family labour supply is to estimate a system of two-adult equations on micro data sets providing information on female and male hours of market work and aggregate family consumption of market goods. Information on all individual consumptions, including pure leisure, is missing from these data sets, as is information on the inputs and outputs in domestic production. The widely used canonical model is based on a specification which implies a particular construction of data for these variables. In this paper we investigate the effects on household welfare rankings of alternative assumptions about the relationship across households between individual labour productivities in household and market production, using a human capital approach. We show empirically that the rankings are very sensitive to these assumptions, a result that is of considerable importance for the analysis of tax policy and income-tested family benefits.