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Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations

  • Yongsung Chang
  • Sun-Bin Kim

We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles. (JEL D31, E32, J22, J24, J31)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 5 (December)
Pages: 1939-1956

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:5:p:1939-1956
Note: DOI: 10.1257/aer.97.5.1939
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  1. Recursive Macroeconomic Theory

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