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Cyclicality of labor wedge and informal sector

Orhan Erem Atesagaoglu and Ceyhun Elgin

Economics Letters, 2015, vol. 136, issue C, 141-146

Abstract: Empirical evidence suggests that the labor wedge, defined as the gap between the firm’s marginal product of labor and the household’s marginal rate of substitution, is quite volatile and countercyclical. This article argues that the presence of an ‘informal sector’ can provide a key for understanding the observed countercyclical behavior of the labor wedge.

Keywords: Labor wedge; Marginal rate of substitution; Marginal product of labor; Informal sector (search for similar items in EconPapers)
JEL-codes: E3 J4 (search for similar items in EconPapers)
Date: 2015
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