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On the welfare cost of business cycles: The role of labor-market heterogeneity

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  • Jeong, Jaehun
  • Shim, Myungkyu

Abstract

Are business cycles equally beneficial or harmful to consumers? Has welfare inequality increased or decreased due to rise of income/wealth inequality? By utilizing a heterogeneous agent RBC model with endogenous labor supply, this paper aims to answer these questions. We first show that while technology-driven business cycles are beneficial on average, a finding that is consistent with the recent literature, the welfare gain is not equally distributed; it is beneficial (resp. harmful) for agents who are relatively rich (resp. poor). The key to understanding the monotonic relationship between welfare gain from the business cycles and wealth level, a finding different from the previous literature that argues that there is a non-monotonic relationship between the two, is shown to be endogenous labor supply. Finally, we analyze the short run consequence of rising income/wealth inequality on welfare cost.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:jmacro:v:73:y:2022:i:c:s0164070422000519
    DOI: 10.1016/j.jmacro.2022.103456
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    More about this item

    Keywords

    Heterogeneous agent model; Welfare cost of business cycles; Endogenous labor supply; Rising inequality;
    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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