Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment
American Economic Review, 2014, vol. 104, issue 4, 1446-60
Chang and Kim (2007) develop an incomplete asset markets model incorporating discrete labor supply and idiosyncratic labor productivity. Their results resolve long-standing puzzles for business cycle models. Specifically, they produce a low correlation between aggregate hours worked and labor productivity (0.23) and a labor wedge with 76 percent the volatility of output. I show that these results arise from errors in their computational method. I resolve their model using a corrected method and find a strong, positive correlation between hours and productivity (0.80). Fluctuations in the labor wedge decrease to 24 percent of those in output.
JEL-codes: D31 E32 J22 J24 J31 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.104.4.1446
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