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Convergence in Macroeconomics: The Labor Wedge
Abstract
I review research on the behavior of the labor wedge, the ratio between the marginal rate of substitution of consumption for leisure and the marginal product of labor. According to competitive, market-clearing macroeconomic models, the ratio is easy to measure and should be equal to the sum of consumption and labor taxes. The observation that the wedge is higher in continental Europe than in the United States has proved useful for understanding the extent to which taxes can explain differences in labor market outcomes. The observation that the ratio rises during recessions suggests some failure of competitive, market-clearing macroeconomic models at business cycle frequencies. The latter observation has guided recent research, including work on sticky wage models and job search models. (JEL E24, E32, J64)
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Cites
Employment Fluctuations with Equilibrium Wage Stickiness
Hall, R. E. (2005) · American Economic Review · doi:10.1257/0002828053828482 · Cited by 1,439
Cited by
Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach
Smets, F., & Wouters, R. (2007) · American Economic Review · doi:10.1257/aer.97.3.586 · Cited by 4,611
Investment shocks and business cycles
Justiniano, A., Primiceri, G. E., & Tambalotti, A. (2010) · Journal of Monetary Economics · doi:10.1016/j.jmoneco.2009.12.008 · Cited by 869
Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods
Chetty, R. (2009) · Annual Review of Economics · doi:10.1146/annurev.economics.050708.142910 · Cited by 666
Beyond GDP? Welfare across Countries and Time
Jones, C. I., & Klenow, P. J. (2016) · American Economic Review · doi:10.1257/aer.20110236 · Cited by 544
(2013) · Econometrica · doi:10.3982/ecta10008 · Cited by 389
Metadata
- Authors
- Shimer, R.
- Venue
- American Economic Journal: Macroeconomics
- Publisher
- American Economic Association
- Published
- 2009-01-01
- Volume
- 1
- Issue
- 1
- Pages
- 280-297
- ISSN
- 1945-7707 (ISSN-L)
- 1945-7715
- OpenAlex
- W2008745156
- Cited by
- 238
- References
- 1
- FWCI
- 60.99
- Type
- journal article
- Language
- en
- Open access
- closed
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