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Resurrecting the Role of the Product Market Wedge in Recessions

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  • Mark Bils
  • Peter J. Klenow
  • Benjamin A. Malin

Abstract

Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The labor wedge can be broken into a price markup and a wage markup. Based on the wages of employees, the literature has attributed the labor wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Any observed cyclicality in wedges calculated for these inputs cannot reflect wage markups. Looking at the past quarter century in the U.S. — including the Great Recession and its aftermath — we find that price markup movements are at least as important as wage markup movements. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

Suggested Citation

  • Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2014. "Resurrecting the Role of the Product Market Wedge in Recessions," NBER Working Papers 20555, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20555
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    Cited by:

    1. Alessandro Gavazza & Simon Mongey & Giovanni L. Violante, 2018. "Aggregate Recruiting Intensity," American Economic Review, American Economic Association, vol. 108(8), pages 2088-2127, August.
    2. Bils, Mark, 2016. "Deducing markups from stockout behavior," Research in Economics, Elsevier, vol. 70(2), pages 320-331.
    3. repec:fip:fedreq:00049 is not listed on IDEAS
    4. repec:eee:macchp:v2-297 is not listed on IDEAS
    5. Benjamin Bridgman, 2016. "Engines of Leisure," BEA Working Papers 0137, Bureau of Economic Analysis.
    6. repec:eee:jmacro:v:56:y:2018:i:c:p:65-88 is not listed on IDEAS
    7. repec:eee:macchp:v2-2131 is not listed on IDEAS
    8. Nlemfu Mukoko, Jean Blaise, 2015. "The Cyclical Behavior of the Markups in the New Keynesian Models," MPRA Paper 72478, University Library of Munich, Germany, revised May 2016.
    9. repec:eee:jmacro:v:55:y:2018:i:c:p:184-198 is not listed on IDEAS

    More about this item

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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