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The Labor Wedge as a Matching Friction

  • Anton A. Cheremukhin

    (UCLA)

  • Paulina Restrepo Echavarria

    (UCLA)

The labor wedge accounts for a large fraction of business cycle fluctuations. This paper uses a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role. We find that frictions to job destruction and bargaining commonly considered in the search literature are not helpful in explaining the labor wedge. We also identify an asymmetric effect of separation, bargaining and matching frictions on unemployment, as well as a potential solution to Shimer's puzzle.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 209.

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Date of creation: 2008
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Handle: RePEc:red:sed008:209
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