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Convergence in Macroeconomics: The Labor Wedge

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  • Robert Shimer

Abstract

I review research on the behavior of the labor wedge, the ratio between the marginal rate of substitution of consumption for leisure and the marginal product of labor. According to competitive, market-clearing macroeconomic models, the ratio is easy to measure and should be equal to the sum of consumption and labor taxes. The observation that the wedge is higher in continental Europe than in the United States has proved useful for understanding the extent to which taxes can explain differences in labor market outcomes. The observation that the ratio rises during recessions suggests some failure of competitive, market-clearing macroeconomic models at business cycle frequencies. The latter observation has guided recent research, including work on sticky wage models and job search models. (JEL E24, E32, J64)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 1 (January)
Pages: 280-97

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Handle: RePEc:aea:aejmac:v:1:y:2009:i:1:p:280-97

Note: DOI: 10.1257/mac.1.1.280
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  1. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
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  13. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  14. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
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  17. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  18. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
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  1. Labor Supply Heterogeneity
    by Agent Continuum in Agent Continuum on 2010-08-02 05:00:24
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