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Heterogeneity and Aggregation in the Labor Market: Implications for Aggregate Preference Shifts

  • Yongsung Chang
  • Sun-Bin Kim

The cyclical behavior of hours worked, wages, and consumption does not conform with the prediction of the representative agent with standard preferences. The residual in the intra-temporal first-order condition for commodity consumption and leisure is often viewed as a failure of labor-market clearing. We show that a simple heterogeneous-agent economy with incomplete markets and indivisible labor generates an aggregation error that looks much like the preference residual in the data. Our results caution against viewing the preference residual as a failure of labor-market clearing or a fundamental driving force of business cycles.

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Paper provided by EconWPA in its series Macroeconomics with number 0402024.

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Length: 30 pages
Date of creation: 11 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402024
Note: Type of Document - pdf; prepared on win98; pages: 30
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  8. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  9. V. V. Chari & Patrick Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," Levine's Bibliography 122247000000000560, UCLA Department of Economics.
  10. Yongsung Chang & Sun-Bin Kim, 2003. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy," Macroeconomics 0307003, EconWPA.
  11. Albert Marcet & Guido Lorenzoni, 1998. "Parameterized expectations approach; Some practical issues," Economics Working Papers 296, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  13. Hall, Robert E., 1987. "Productivity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 421-444, January.
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