Search Frictions and the Labor Wedge

Murat Tasci and Andrea Pescatori

No 2011/117, IMF Working Papers from International Monetary Fund

Abstract: This paper shows that labor market search frictions do not explain fluctuations in the labor wedge per se. However, the introduction of extensive and intensive margin clarifies 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 competitive model. Finally, we show that it is possible to measure a strongly procyclical labor wedge when the actual data generating process is a search model that allows for movements in both margins.

Keywords: WP; business cycle; labor market; Labor Market Search; Business Cycle Accounting; Labor Wedge; prototype business cycle model; business cycle frequency; RBC model; prototype model; Frisch elasticity; accounting literature; wedge equation; utility function; labor demand and supply equation; employment fluctuation; Labor market frictions; Business cycles; Employment; Labor markets (search for similar items in EconPapers)
Pages: 29
Date: 2011-05-01
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Citations: View citations in EconPapers (17)

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