Arbeitspapier

Search Frictions and the Labor Wedge

This paper assesses whether labor market frictions, in the form of searching and matching, can help explain movements in the labor wedge - the gap between the marginal rate of substitution (MRS) and the marginal productivity of labor in a perfectly competitive business cycle model. Results suggest that those frictions are not able to explain fluctuations in the labor wedge, per se. However, the introduction of extensive and intensive margin shows that measuring the MRS in terms of total hours artificially introduces procyclicality in the MRS. When the MRS is correctly measured in terms of hours per worker, the labor wedge obtained is less variable than the one of the perfectly competitive model. A Frisch elasticity of 2.8, as in most macro models, implies a 20 percent decline in the variability of the labor wedge. A Frisch elasticity closer to micro estimates implies an even higher reduction. Finally, we show that it is possible to measure a strongly procyclical labor wedge as in CKM (2007) even if the actual data generating process does not have any labor wedge but has search frictions that allow for movements in both labor margins.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. 1113

Classification
Wirtschaft
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Unemployment: Models, Duration, Incidence, and Job Search
Subject
Labor Market Search
Business Cycle Accounting
Labor Wedge
Suchtheorie
Arbeitsproduktivität
Kapazitätsauslastung
Vollkommener Wettbewerb
Konjunkturtheorie

Event
Geistige Schöpfung
(who)
Pescatori, Andrea
Tasci, Murat
Event
Veröffentlichung
(who)
Koç University-TÜSİAD Economic Research Forum (ERF)
(where)
Istanbul
(when)
2011

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Pescatori, Andrea
  • Tasci, Murat
  • Koç University-TÜSİAD Economic Research Forum (ERF)

Time of origin

  • 2011

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