Valuing Houses but Not Housewives

Nancy Folbre is professor emerita of economics at the University of Massachusetts, Amherst.

Home ownership allows people to invest in an asset they own, enjoying the services of that asset rather than paying rent to somebody else. That’s why imputed rent is calculated as a component of personal income in national income accounts - an important exception to the rule that only monetary transactions are included.

A stay-at-home spouse who specializes in unpaid work also increases household living standards, by reducing the need to purchase services like child care, housekeeping, gardening and meals away from home. Imputations of the value of this work are included in some experimental national income accounts but are largely ignored in discussions of public policy, with some perverse consequences.

My fellow Economix blogger Bruce Bartlett clearly explains the logic behind imputing the value of rent:

Consider two homeowners living in identical houses. Suppose they trade houses, each living in the other’s. They now pay rent to each other because the other is now the other’s landlord. If they identical rent it would appear that it all cancels out, except that each now has rental income to report on her taxes.

He goes on to explain why it might make sense to tax such imputed income.

Similar logic applies to nonmarket household work. Consider two adults living in identical homes who are not working for pay, each caring for two children under the age of 6. Each day at 8 a.m. they could switch homes, take care of each another’s children, clean and do laundry, and prepare meals. Then at 5 p.m. they could return to their own homes, paying each other the same amount for services rendered.

In the United States today, where a high unemployment rate makes it difficult for many to find the paid employment required to qualify for Temporary Assistance to Needy Families and the earned income tax credit, such arrangements could prove advantageous for those with the rather sophisticated knowledge of tax law necessary to legally carry them out.

Assume that these two single parents paid each another $15,000 a year (about equivalent to the minimum wage for a 40-hour work week). They would be required to pay Social Security taxes as both employer and employee that would cost them each $1,860. On the other hand, this payment could increase their eligibility for retirement benefits.

In some states, they might be “earning” too much to be eligible for Temporary Assistance for Needy Families. However, if they were eligible, their paid employment would satisfy the paid work requirement for that program, and the benefits would be likely to exceed the cost of the Social Security taxes they paid (though still leaving them far below the poverty level).

They would definitely be eligible for a federal earned income tax credit of about $5,372 each year per year - still inadequate to support their families but greater than what they could get for taking care of their own children.

The same double standard is applied to married housewives, who are typically described as “not working,” although on average they spend more than 40 hours a week in activities that someone else could be paid to perform. Of course, lots of people do unpaid work, not just stay-at-home spouses. And when married women engage in paid employment, they don’t reduce their hours of unpaid work enough to compensate, working longer hours overall.

Still, a comparison of the unpaid work hours provided by married women with children under 18 when they work full-time for pay and when they are not employed shows that the latter - the “housewives” - provide more than 20 hours extra a week of unpaid work.

So there is a real difference in living standards between a family in which both parents are working, each earning disposable income of $25,000 per year, and one in which one parent earns disposable income of $50,000 a year and the other stays home providing those extra 20 hours of household services.

Yet the rules governing access to benefits like the earned income tax credit are based on money income, regardless of the number of adults working for pay or the level of unpaid family work.

It seems unlikely that families engage in detailed calculations, but they probably intuit that marginal tax rates (including loss of public assistance benefits as family income goes up) subsidize unpaid work for those at both ends of the spectrum - those who can’t find a full-time job and those who can afford the luxury of a stay-at-home spouse. Both the dependent exemption and Social Security provisions for spouses reduce effective tax rates for families with housewives.

The value of unpaid family care is also relevant to discussions of federal income tax rates. The field of public finance hasn’t caught up with the growing literature on nonmarket household production, generally using the term “labor supply” to refer only to paid labor and assuming that the only alternative to paid labor is leisure. But high tax rates on market income can have the effect of increasing time devoted to family care, encouraging fathers, in particular, to spend more time with their children.

Indeed, as Alberto Alesina, Andrea Ichino, and Loukas Karabarbounis show in a recent Economic Policy article, a higher tax on men’s earnings than on women’s earnings could lead to overall efficiency gains, as well as a more balanced gender division of labor.

I’m not persuaded that we should tax men and women differently. But we should consider the ways in which current tax policies reinforce the traditional gender of labor without providing much support for the most important aspect of unpaid work - family care. I’ll turn to that policy issue in my next post.