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Variable Effort, Business Cycles, and Economic Welfare

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  • Kim, Minseung
  • Shim, Myungkyu

Abstract

Recent literature has shown that productivity-driven business cycles are beneficial to consumers in the context of market clearing real business cycle model. In this paper, we argue that this notion of welfare-improving business cycles does not jointly satisfy (1) the balanced growth path property and (2) micro evidence on the Frisch labor supply elasticity. We then show that once “variable effort,” a channel that plays an important role in the business cycle frequency but has been ignored by the previous literature on the welfare cost of business cycles, is introduced into the model, welfare-improving business cycles can be achieved in relatively plausible parameter regions.

Suggested Citation

  • Kim, Minseung & Shim, Myungkyu, 2020. "Variable Effort, Business Cycles, and Economic Welfare," Economics Letters, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303293
    DOI: 10.1016/j.econlet.2020.109544
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    1. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 1-56.
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    Cited by:

    1. Jeong, Jaehun & Shim, Myungkyu, 2022. "On the welfare cost of business cycles: The role of labor-market heterogeneity," Journal of Macroeconomics, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Variable effort; Real business cycle model; Balanced growth path; Welfare cost of business cycles;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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