Market Work, Home Production, Consumer Demand and Unemployment among the Unskilled

We propose and test a general equilibrium model in which longer working time and higher labor force participation lead to a fall in unemployment. Longer working hours and higher labor force participation have two direct effects: People have higher incomes and less (leisure) time. This has implications for the composition of consumer demand, since people spend less time on home production. Instead, they outsource more domestic tasks to the market. Consumer demand shifts toward unskill-intensive goods. The relative demand for unskilled labor rises and unemployment falls. We test our model in two ways: First, we study the link between labor market partici- pation, home production and the demand for household and similar services using the German time use survey conducted in 1991/92. Second, we use cross-country time- series data on OECD countries between 1980 and 2003 to directly examine the link between labor force participation and the unemployment rate. The empirical results corroborate the predictions from the theoretical model.