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Time-Varying Wage Risk, Incomplete Markets, and Business Cycles

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  • Shuhei Takahashi

    (Kyoto University)

Abstract

Idiosyncratic wage risk exhibits cyclical variation. This study analyzes how such risk fluctuations affect business cycles. I use a heterogeneous agent model with uninsured idiosyncratic wage risk, indivisible labor, and a borrowing constraint. I introduce risk fluctuations as uncertainty shocks and calibrate those shocks using micro-level wage data in the United States. I find that uncertainty shocks affect labor market dynamics through ex-ante uncertainty and ex-post distribution effects. In particular, uncertainty shocks mainly influence the employment of low-productivity individuals, generating negative comovement between total hours worked and average labor productivity. Including uncertainty shocks in addition to aggregate total factor productivity shocks helps the model account for the weakly negative hours–productivity correlation and large fluctuations in the labor wedge seen in the United States. (Copyright: Elsevier)

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  • Shuhei Takahashi, 2020. "Time-Varying Wage Risk, Incomplete Markets, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 195-213, July.
    • Handle: RePEc:red:issued:19-8
    DOI: 10.1016/j.red.2019.011.001
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    3. Tatsuro Senga, 2014. "A New Look at Uncertainty Shocks: Imperfect Information and Misallocation," UTokyo Price Project Working Paper Series 042, University of Tokyo, Graduate School of Economics.
    4. Julia Thomas & Aubhik Khan, 2012. "Uncertainty Shocks in an Economy with Collateral Constraints," 2012 Meeting Papers 1075, Society for Economic Dynamics.

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    More about this item

    Keywords

    Uninsured idiosyncratic wage risk; Indivisible labor; Uncertainty shocks; Hours–productivity correlation; Labor wedge; Incomplete markets;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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