The Efficiency and Price Sensitivity of Do-It-Yourself Labor

Citation:

Sophia R. Wunderink-van Veen (1993) ,"The Efficiency and Price Sensitivity of Do-It-Yourself Labor", in E - European Advances in Consumer Research Volume 1, eds. W. Fred Van Raaij and Gary J. Bamossy, Provo, UT : Association for Consumer Research, Pages: 312-316.

European Advances in Consumer Research Volume 1, 1993      Pages 312-316

THE EFFICIENCY AND PRICE SENSITIVITY OF DO-IT-YOURSELF LABOR

Sophia R. Wunderink-van Veen, Erasmus University Rotterdam, The Netherlands

Do-it-yourself production is only a small fraction of total productive non-market activities of households, but a kind of production for which there exists a market substitute. In this paper the time a do-it-yourselver needs for a job is compared with the time a professional craftsman would need for the same job. This comparison enables us to measure the relative (in)efficiency of the do-it-yourselver.

For many households the main reason for d-i-y production is the expensiveness boarding out the job. We estimate the price sensitivity of the do-it-yourselver by answering the question how much cheaper the professional craftsman should be in order to persuade the do-it-yourselver to board out the maintenance and repairs of his house.

1. INTRODUCTION

The do-it-yourself market provides all kinds of tools and prefabricated parts in order to make it easier for the do-it-yourselver to maintain or repair the house he owns. Information about how to carry out maintenance or repairs is provided by the d-i-y shops, by friends or experts and it can be found in books. However the maintenance will still require a considerable amount of household labor time and skill. Boarding out the maintenance is an alternative that will cost more money, but less household labor time.

The choice between d-i-y and boarding out is expected to be influenced by the comparison of the costs and benefits of these alternatives. Boarding out implies that one has to find a craftsman, negotiate about the price and supervise the job (Morgan and Duncan, 1982). Do-it-yourself implies that one first has to find out how to do the job, to buy the necessary materials for the repair and to carry out the job.

The costs of boarding out are: the price of the craftsman's labor (including the materials) and the time the house owner has to spend on finding the craftsman and the cost of being present while the craftsman is working.The costs of d-i-y are: the price of the materials needed and the time spent on gathering information, buying materials and tools and doing the job.

The benefits of the two alternatives are more or less the same with respect to the final result. The specific benefit of boarding out is that the household feels sure that the job is done correctly, the craftsman takes the responsibility. The benefits of d-i-y is that the household may enjoy doing this kind of job, they can do it at the most feasible moment and carry it out exactly the way they want.

Boarding out costs more money than d-i-y because of expensive hired labor, whereas d-i-y will cost more household labor time but less money than boarding out. In general a craftsman will need less time to finish a job than a do-it-yourselver. The question we will try to answer is: How much less. In other words, we shall determine the relative efficiency of the do-it-yourselver and verify to what extend it is affected by the availability of tools, skills and experience of the household.

The choice between boarding out and d-i-y may be determined by household characteristics like income, the scarcity of time and the relative efficiency of the do-it-yourselver. However, if do-it-yourself production is considered as some kind of a hobby and not only a way to save money, it does not matter that the do-it-yourselver works less efficient. In that case the do-it-yourself market will find its (potential) clients in all income groups, as long as they are not short of time. Even if the professional worker would lower his price, many households would still do the maintenance themselves.

The second question we shall try to answer is to what extend households react to price changes of the professional craftsman and which factors significantly influence this price sensitivity.

In section 2 of this paper d-i-y production is introduced as a form of household production. Two hypothesis concerning the efficiency and price sensitivity of the do-it-yourselver are posed. In section 3 the data used to test these hypothesis are described and section 4 contains the results. Conclusions are in section 5.

2. D-I-Y-PRODUCTION

Household activities entitled 'do-it-yourself' activities are special in the sense that the name suggests that these activities ought to be done by a professional, but are now done by household members themselves. The market alternative is available (Gronau 1977), households know this, but deliberately choose to do it themselves.

With respect to the production process, household members are is an amateurs compared to the professional worker: they usually did not receive professional schooling, they may not have all necessary tools at their disposal and they may lack experience. Still we may assume that the final result of d-i-y production equals that of a professional, that is the value added is the same. Only, the amount of time a craftsman would need to do the same job will be less.

The time the do-it-yourselver actually needs to do job, divided by time a professional needs for the same job determines the relative efficiency of the do-it-yourselver.

We expect that:

The relative efficiency of the do-it-yourselver, the ratio between the labor time of a craftsman and the do-it-yourself labor time for the same job, depends on household characteristics such as skills, experience and available tools.

Hypothesis 1

One of the motives for d-i-y production is that it is cheaper than boarding out. Indeed, less money is involved in d-i-y activities, but what about household labor time? If households think that their time is 'free', then d-i-y is certainly cheaper. But this is not very rational. Households should also think of alternative time use. If they spend extra hours in the labor market they can increase their income and raise their utility level, if they spend time on other activities they can also increase utility. D-i-y production will only be cheaper than boarding out the job, if household members do not evaluate their price of time too high (Hill, 1985).In the short run, only few people will be able to work additional hours in the labor market. Therefore, in this analysis we suppose that income is fixed.

TABLE 1

MOTIVES FOR MAINTENANCE BY HOUSEHOLD MEMBERS

There may also be other, non-financial motives for d-i-y production. People may enjoy doing things themselves, or they may prefer d-i-y production because they can arrange the timing exactly as they like. If d-i-y is some kind of a hobby, there is additional positive 'process utility', which is lost when the job is boarded out (Winston 1982). This extra process utility can be considered as a form of joint production (Graham and Green, 1984).Others may have strong motives for boarding out. They may not be quite capable of doing it themselves, or they may dislike this kind of jobs and prefer other activities. For them there is an additional negative utility flow for d-i-y activities.

We expect that:

The wage drop needed to pursue the d-i-y to let the professional worker do the maintenance, will be greater, the lower the income of the d-i-y is, the higher his relative efficiency and the more he likes to do d-i-y maintenance.

Hypothesis 2

The hypothesis 1 and 2 will be tested by means of an empirical survey, to be described in the next section.

3. THE DATA

The data used in this research are collected in The Netherlands by SWOKA [SWOKA is a foundation for Research in Consumer Affairs in The Netherlands.] in 1987. The 377 households of the sample own their houses and the sample is representative for this part of the population (about 50% of Dutch houses is owned by the occupant). For a description of the survey, see Bunk and Wunderink (1989).

The households provided information on the time that each household member, their friends and relatives and outsiders bestow on the maintenance and rebuilding of their homes. They were also asked the following questions about their d-i-y activities:

1. How much money do you think you saved by doing this job yourself?

2. What is the maximum amount of money you would have been willing to pay to a skilled craftsman in order to let him do the job?

The answer to question 1 is an indication of the market value of d-i-y production, the answer to question 2 resembles the contingent valuation approach (Brookshire and Crocker, 1981 and Quah, 1987) to d-i-y production. By dividing the 'amount saved by d-i-y' by the wage rate of a craftsman, we find the household's estimate of the time the craftsman needs for the job they actually did themselves. This is indicated as 'craftsman's time'.

Besides background information about income, labor market participation, family composition etc., the households were asked about their motives, handiness and experience with d-i-y jobs and about the tools they have available.

4. RESULTS

4.1 Efficiency of the do-it-yourselver.

First the relation between the labor time a craftsman would need for a job and household time, that was actually spent on the job, is determined. In this relation four variables are introduced, that may influence the efficiency of the household production process: the handiness of the main breadwinner and his partner, the experience the breadwinner has with d-i-y jobs and the number of different kinds of tools owned.

From table 2 it follows that TIMECRAFT is mainly determined by TIMEHH and hardly affected by the four additional variables. Replacing these four variables by their mean values we find:

TIMECRAFT = 1.64 (TIMEHH)

This is illustrated in figure 1.

The time elasticity is 0.61, which means that a 1% increase in the time spent by the d-i-y can be compensated by 0.61% increase in craftsman labor time.

The rather steep start of the curve may be due to the fact that for small jobs both the d-i-y and the craftsman need a (fixed) amount of time to get the job started. The relative efficiency of the craftsman will become more clear when the job is larger.

For a do-it-yourselver who indicates that he is very handy (HANDY1=3), or owns many tools an upwards shift of the curve is expected. However, the estimated coefficients of HANDY and TOOLS are not significant.

4.2 Price sensitivity of the do-it-yourselver

The difference between the price the household thinks the professional would charge for a job and the amount the household says to be willing to pay for this job, is an indication of the price sensitivity of the do-it-yourselver. This difference, divided by the time needed for the job, is the drop in hourly wage the do-it-yourselver requires from the professional, in order to board out the maintenance to the professional: DP_cr.

If the main reason for d-i-y is that "it is cheaper", a moderate wage drop may already be sufficient to persuade the household to board out the maintenance, in cases that the motive is "hobby", or some other positive motive, households will probably less easy give up their d-i-y activities. There may also exist a correlation with the relative efficiency of the d-i-y-worker and his income.

TABLE 2

RELATION BETWEEN CRAFTSMAN AND HOUSEHOLD LABOR TIME FOR D-I-Y JOBS

FIGURE 1

RELATION BETWEEN HOW LONG IT TAKES THE CRAFTSMAN

The results of the analysis are shown in table 3.

The number of observations is 72, since only 72 households answered the difficult question about the amount they would have been willing to pay for boarding out the maintenance, together with the other questions asked. The R corrected for degrees of freedom is only 8%.

None of the motives for d-i-y has significant influence on the price sensitivity of the do-it-yourselver.

Handy breadwinners require a larger wage drop of the craftsman than others. Income has no significant effect and neither has the dummy variable for full-time jobs. This variable is meant to measure the relative scarcity of time in the household.

If mean values of the explanatory variables are substituted in the regression [INCOME=3.84 (X F1000.-a month), DUMMY FULL-TIME-JOB=.75, EFFICIENCY=.8, TIMEHH=136.65, DUMMY CHEAPER=.70, DUMMY HOBBY=.175, DUMMY TIMING=.175, HANDY1=2.54, HANDY2=2.59, EXPERIENCE=2.50.], we find that the wage drop should be about Dfl 29, a wage reduction of more than 50% of the normal wage the craftsman charges. The average price of labor charged during this research project was Dfl 43 and only when it is around Dfl 14 the average household would give up its d-i-y maintenance and repairs on the house and consider boarding out. This price, Dfl 14, is even lower than the average wage rate that was charged by people working in the black market: Dfl 24. It means that if the household would offer its services to other people, in the black market, it could earn Dfl 24 an hour, but it is not willing to pay even Dfl 15 to others. Obviously household members prefer working in their own house, in stead of working for others. This phenomena was observed before by Thaler (1980), for household activities.

TABLE 3

PRICE SENSITIVITY OF THE DO-IT-YOURSELFER

For households with a higher than average value of the variables with a positive sign in the regression, the wage drop should even be greater than Dfl 29, for households with a lower than average value it can be smaller. The opposite holds for the variables in the regression with negative sign.

5. CONCLUSIONS

Although the do-it-yourselver frequently has many tools, often thinks that he is quite handy and has some experience with repair and maintenance jobs, he needs much more time than a craftsman to finish the job. For small jobs this does not hold, which means that it is not efficient to let these jobs be carried out by a craftsman, but for a larger tasks labor time is saved by boarding out.

A consequence of the inefficiency of the do-it-yourselver is, that if the value added of d-i-y production is determined by measuring time use and attaching a market wage rate to the hours used, this will result in a tremendous over estimation of the market value of d-i-y production. During the investigation the Dutch spent on average 75 hours a year on d-i-y activities. If wage rate is Dfl 43 then the market value of d-i-y production of an average household is: 75x43=Dfl 3225.

However, a professional would need less hours to finish the work: 23 hours unless these 75 hours are filled in with many small jobs.

So a more realistic estimate of the market value of d-i-y production of an average household is: 23x43=Dfl 989.

This may be true for other forms of household production as well.

The do-it-yourselvers have different motives for doing the maintenance themselves, some do it because it is cheaper, others because they like to do this kind of work. For most households there are several reasons for d-i-y. In most cases the price the craftsman charges is high compared to the net wage rate of the household breadwinner. The wage rate of the craftsman should drop by over 60% in order to let households board out the maintenance of their house. This means that most households are not willing to give up their d-i-y activities easily.

LITERATURE

Becker, G.S. (1965), "A Theory of the Allocation of Time", Economic Journal vol. 75.

Brookshire, D.S. and T.D. Crocker (1981), The Advantages of Contingent Valuation Methods for Benefit-Cost Analysis, Public Choice, 36 pp.235-252.

Bunk A.R. and S.R.Wunderink (1989) "Doe-het-zelf Produktie en de Woning", SWOKA-rapport nr. 74.

Graham, J.W. and C.A. Green (1984), Estimating the Parameters of a Household Production Function with Joint Products, The Review of Economics and Statistics, 66, pp. 277-282.

Gronau, J. (1977), Leisure, Home Production and Work, The Theory of the Allocation of Time Revisited, Journal of Political Economy, 85, pp.1099-1123.

Hill, M.S. (1985) Investment of Time in Houses and Durables, in: Time, Goods and Well-Being, ed. F.T. Juster and F.P. Stafford. University of Michigan.

Morgan, J.N., G.J. Duncan (1982), Making Your Choices Count, Economic Principles for Everyday Decisions, The Univertsity of Michigan Press.

Quah, E. (1987), Valuing Family Household Production: a Contingent Evaluation Approach, Applied Economics, 19, pp. 875-889.

Thaler, R. (1980), Towards a Positive Theory of Consumer Choice, Journal of Economic Behaviour and Organization, 1, pp. 39-60.

Winston, G.C. (1982), The Timing of Economic Activities, Cambridge: Cambridge University Press.

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