Estimating the intertemporal elasticity of substitution in a model with household production: Implications for macroeconomics

We generalize the life cycle labor supply model to incorporate household production, argue this corrects a bias in previous studies, and show that it has important implications for macroeconomics. Using Michigan Time Use data, we construct a synthetic cohort and estimate the structural model. The finding is that without home production our estimated elasticities are low, consistent with the literature, and that adding home production substantially increases the estimates. We simulate a business cycle model incorporating preference parameters consistent with our estimate, and show this model can account for much of the observed variability in hours worked over the business cycle.