Resurrecting the Role of the Product Market Wedge in Recessions

Mark Bils, Pete Klenow and Benjamin Malin

No 516, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called ?the labor wedge? ? a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The intratemporal wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Looking at the past quarter century in the United States, we find that price markup movements are at least as important as wage markup movements ? including during the Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

Keywords: Wage markups; Price markups; Labor wedge; Business cycles (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-10-09
New Economics Papers: this item is included in nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Resurrecting the Role of the Product Market Wedge in Recessions (2018)
Working Paper: Resurrecting the Role of the Product Market Wedge in Recessions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:516

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