On the welfare cost of business cycles: The role of labor-market heterogeneity

Jaehun Jeong and Myungkyu Shim

Journal of Macroeconomics, 2022, vol. 73, issue C

Abstract: Are business cycles equally beneficial or harmful to consumers? Has welfare inequality increased or decreased due to rise of income/wealth inequality? By utilizing a heterogeneous agent RBC model with endogenous labor supply, this paper aims to answer these questions. We first show that while technology-driven business cycles are beneficial on average, a finding that is consistent with the recent literature, the welfare gain is not equally distributed; it is beneficial (resp. harmful) for agents who are relatively rich (resp. poor). The key to understanding the monotonic relationship between welfare gain from the business cycles and wealth level, a finding different from the previous literature that argues that there is a non-monotonic relationship between the two, is shown to be endogenous labor supply. Finally, we analyze the short run consequence of rising income/wealth inequality on welfare cost.

Keywords: Heterogeneous agent model; Welfare cost of business cycles; Endogenous labor supply; Rising inequality (search for similar items in EconPapers)
JEL-codes: E24 E30 E32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:73:y:2022:i:c:s0164070422000519

DOI: 10.1016/j.jmacro.2022.103456

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