Search Frictions and the Labor Wedge

Andrea Pescatori () and Murat Tasci

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: 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.

Keywords: Labor Market Search; Business Cycle Accounting; Labor Wedge (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-05
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1113.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden (http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1113.pdf [301 Moved Permanently]--> https://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1113.pdf)

Related works:
Working Paper: Search frictions and the labor wedge (2011)
Working Paper: Search Frictions and the Labor Wedge (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:koc:wpaper:1113

Access Statistics for this paper

More papers in Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum Contact information at EDIRC.
Bibliographic data for series maintained by Sumru Oz ().