Structural Transformation or Marketization? The Role of Household Production in Consumption Expenditure

Structural transformation, the shift from goods to services in the economy, is a significant economic change, but its underlying causes remain uncertain. Part of the rise in market services can be attributed to the transition from household production of services to market production, known as marketization. This paper presents novel findings about the extent of this shift. We construct household production in the United States over the period 1947_2023. When we incorporate household production into consumption expenditure, which aligns with the natural accounting concept when discussing preferences, we find that the share of services remains constant for nearly 80 years. This contrasts sharply with the 30-percentage point increase in market consumption when household production is excluded. These findings suggest income effects do not account for the long-run trends in a standard model of structural transformation when household production is included. The results suggest that income effects in structural transformation reflect marketization.