IDEAS home Printed from https://ideas.repec.org/p/red/sed012/737.html
   My bibliography  Save this paper

Labor Supply, Aggregation and the Labor Wedge

Author

Listed:
  • Jose Lopez

    (HEC PARIS)

Abstract

This paper discusses the role of household heterogeneity in a model in which idiosyncratic consumption and labor income risks manifest as a distortion to the intra-temporal optimal condition of the representative agent. Aggregation over the undistorted labor-leisure condition of each household leads to a wedge between the Marginal Rate of Substitution, between consumption and leisure, (MRS) and the Marginal Product of Labor (MPL), through the lens of the representative agent model. I use household survey data to assess the properties of this aggregation wedge. I find that it is consistent with the systematic deviation between the MRS and the MPL observed in aggregate data, the so-called "Labor Wedge", for both the long-run and the business cycles. Additionally, I explore the quantitative implications of the model assuming imperfect insurability against idiosyncratic shocks. I show that cyclical changes in the distribution of household productivity and in the degree of risk sharing lead to cyclical changes in the aggregation wedge, as if the representative agent faced higher labor taxes - or was lazier- during recessions. The model also exhibits novel dynamics for labor, relative to the benchmark RBC, because of the various labor supply elasticities induced by the individual productivities and the wealth distribution.

Suggested Citation

  • Jose Lopez, 2012. "Labor Supply, Aggregation and the Labor Wedge," 2012 Meeting Papers 737, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:737
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2012/paper_737.pdf
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed012:737. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.