Is the economy just a collection of households?

Economists will often talk about the ‘household’ as though we make all of our spending or saving decisions together with everyone else under the same roof.¹ Although households do share resources and decisions, people move between households all the time, and decision-making power is not always equal; so accounting for economies in terms of households isn’t always the best idea.

On one level, counting the economy in households makes sense. Households are made up of individuals who in some sense have a shared interest, by nature of being under one roof. They share resources and skills. Some have one income stream coming into the household, and make a lot of their main payments together. For some time, the terms ‘family’ and ‘household’ were interchangeable in economic theories, rather than any more complex understanding of who lives within the same household.²

But as we all know from our own experience, households are, in real life, a lot more complicated than this. Some of us might live with friends, a partner, or alone. Some of us may not have a home, or may travel from place to place all the time. Nowadays we might even move between countries regularly. A single household could have as many sources of income as it does inhabitants.

And even within a relatively stable household, the assumptions economists attached to the household don’t always hold. Decision-making power over spending and saving isn’t necessarily equal within a household. Individuals can have very different levels of bargaining power, depending on their gender, their age, the amount of income and assets they have to fall back on, and loads of other factors.³ Assuming that a household’s decision represents every individual’s interests discounts how much factors like age and gender influence the extent to which an individual will be heard in the household’s decision-making process.