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Cyclicality of labor wedge and informal sector

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  • Atesagaoglu, Orhan Erem
  • Elgin, Ceyhun

Abstract

Empirical evidence suggests that the labor wedge, defined as the gap between the firm’s marginal product of labor and the household’s marginal rate of substitution, is quite volatile and countercyclical. This article argues that the presence of an ‘informal sector’ can provide a key for understanding the observed countercyclical behavior of the labor wedge.

Suggested Citation

  • Atesagaoglu, Orhan Erem & Elgin, Ceyhun, 2015. "Cyclicality of labor wedge and informal sector," Economics Letters, Elsevier, vol. 136(C), pages 141-146.
    • Handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:141-146
    DOI: 10.1016/j.econlet.2015.09.024
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    Cited by:

    1. Gallen, Trevor S., 2018. "Is the labor wedge due to rigid wages? Evidence from the self-employed," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 184-198.
    2. Ceyhun Elgin & Ferda Erturk, 2019. "Informal economies around the world: measures, determinants and consequences," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 9(2), pages 221-237, June.

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    More about this item

    Keywords

    Labor wedge; Marginal rate of substitution; Marginal product of labor; Informal sector;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • J4 - Labor and Demographic Economics - - Particular Labor Markets

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