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How does household production affect measured income inequality?

Harley Frazis and Jay Stewart
Journal of Population Economics
Vol. 24, No. 1 (January 2011), pp. 3-22
Published by: Springer
Stable URL: http://www.jstor.org/stable/41488714
Page Count: 20
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How does household production affect measured income inequality?
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Abstract

Theory predicts that lower-income households will produce more goods at home. Thus extended income, which includes household production, should be more equally distributed than money income. Previous studies have confirmed the greater equality of extended income and speculated that the result is due to the weak correlation between money income and household production. We also confirm this result and identify the true reason. We show that the weak correlation cannot be the explanation and that virtually all of the difference in measured inequality between the two measures is due to the addition of a large constant—the average value of household production—to money income.

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