Luxuries, Necessities, and the Allocation of Time

Lei Fang, Anne Hannusch, and Pedro Silos
Working Paper 2021-28
December 2021

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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.

JEL classification: J22, E21, D11

Key words: time allocation, consumption expenditures, luxuries, necessities, activity production, inequality

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).

Please address questions regarding content to Lei Fang at the Federal Reserve Bank of Atlanta, Anne Hannusch at the University of Mannheim, or Pedro Silos at Temple University.

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