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Convergence in Macroeconomics: The Labor Wedge

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Author Info
Robert Shimer

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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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File URL: http://hdl.handle.net/10.1257/mac.1.1.280
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Publisher 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

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  1. Hevia, Constantino, 2009. "Emerging market fluctuations : what makes the difference ?," Policy Research Working Paper Series 4897, The World Bank. [Downloadable!]
  2. David S. Jacks & Christopher M. Meissner & Dennis Novy, 2009. "Trade Booms, Trade Busts, and Trade Costs," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  3. Ray C. Fair, 2009. "Has Macro Progressed?," Cowles Foundation Discussion Papers 1728, Cowles Foundation, Yale University. [Downloadable!]
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This page was last updated on 2009-12-22.

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