American Economic Review Vol. 97 No. 5 2007

Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations

Yongsung Chang¹; Sun-Bin Kim²

¹ Department of Economics, University of Rochester, Rochester, NY 14627, and Yonsei University. · ² Department of Economics, Korea University, Anam-Dong, Seongbuk-Gu, Seoul, Korea 136-701.

Abstract

We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles.

DOI

10.1257/aer.97.5.1939

Volume

97

Issue

5

Pages

1939-1956

Language

en

Sources

crossref openalex bibtex:phds-export.bib

Cite

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