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Heterogeneity and Aggregation in the Labor Market: Implications for Aggregate Preference Shifts

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  • Yongsung Chang
  • Sun-Bin Kim

Abstract

The cyclical behavior of hours worked, wages, and consumption does not conform with the prediction of the representative agent with standard preferences. The residual in the intra-temporal first-order condition for commodity consumption and leisure is often viewed as a failure of labor-market clearing. We show that a simple heterogeneous-agent economy with incomplete markets and indivisible labor generates an aggregation error that looks much like the preference residual in the data. Our results caution against viewing the preference residual as a failure of labor-market clearing or a fundamental driving force of business cycles.

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File URL: http://128.118.178.162/eps/mac/papers/0402/0402024.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0402024.

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Length: 30 pages
Date of creation: 11 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402024

Note: Type of Document - pdf; prepared on win98; pages: 30
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Web page: http://128.118.178.162

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Keywords: Aggregation; Heterogeneity; Incomplete Market; Aggregate Preference Shifts;

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  1. Mark Bils & Peter J. Klenow, 1998. "Using Consumer Theory to Test Competing Business Cycle Models," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 233-261, April.
  2. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  3. Heckman, James, 1984. "Comments on the Ashenfelter and Kydland papers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 209-224, January.
  4. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  7. Nakajima, Tomoyuki, 2005. "A business cycle model with variable capacity utilization and demand disturbances," European Economic Review, Elsevier, vol. 49(5), pages 1331-1360, July.
  8. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  9. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  10. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 1-25, February.
  11. Robert E. Hall, 1997. "Macroeconomic Fluctuations and the Allocation of Time," NBER Working Papers 5933, National Bureau of Economic Research, Inc.
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  13. Hall, Robert E., 1987. "Productivity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 421-444, January.
  14. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August.
  15. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  16. Albert Marcet & Guido Lorenzoni, 1998. "Parameterized expectations approach; Some practical issues," Economics Working Papers 296, Department of Economics and Business, Universitat Pompeu Fabra.
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Cited by:
  1. 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.
  2. Hafedh Bouakez & Takashi Kano, 2005. "Learning-by-Doing or Habit Formation?," Working Papers 05-15, Bank of Canada.
  3. Richard Rogerson, 2006. "Understanding Differences in Hours Worked," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 365-409, July.

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