Household Production Model I:. The allocation of time. Household production model. In the household production model, utility is derived from the activities (Z i ) in which people are engaged. U=U(Z 1 , Z 2 ,…, Z N )
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Household Production Model I:
The allocation of time
Solving the time constraint for time at work:
Substituting this into the goods constraint results in:
where: E(w) = expected wage
p = probability of employment
w = wage rate if employed
As the unemployment rate rises during a recession, the probability of being employed, p, declines, leading to a reduction in the expected wage.