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Real Wage Rigidity, Heterogeneity, And The Business Cycles

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  • Ma, Eunseong

Abstract

This paper investigates the quantitative implications of real wage rigidities and heterogeneity for two long-lasting puzzles in the business cycle literature: the low correlation between total hours worked and labor productivity and the large volatility of the labor wedge, defined as a gap between the marginal rate of substitution of aggregate leisure for aggregate consumption and the marginal product of aggregate labor. I shed light on these issues by extending a heterogeneous-agent model with an indivisible labor supply choice to real wage rigidities. I find that a small amount of real wage stickiness would be sufficient to resolve both anomalies when long-term wage contracts and heterogeneity are taken into account.

Suggested Citation

  • Ma, Eunseong, 2021. "Real Wage Rigidity, Heterogeneity, And The Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 25(7), pages 1701-1725, October.
    • Handle: RePEc:cup:macdyn:v:25:y:2021:i:7:p:1701-1725_3
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