The role of household production in models of involuntary unemployment and underemployment

A classic result in the theory of labour contracts with asymmetric information is that underemployment results if and only if leisure is an inferior good. A classic result in models where unemployment occurs because of indivisibilities, including implicit contract models and some equilibrium macroeconomic models, is that unemployment is involuntary if and only if leisure is an inferior good. We introduce household production into otherwise standard versions of these models and show that this implies we can have underemployment in asymmetric-information models or involuntary unemployment in indivisible-labour models without assuming that leisure is inferior. -Authors