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Time-Varying Wage Risk, Incomplete Markets, and Business Cycles

Shuhei Takahashi

No 912, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Idiosyncratic wage risk exhibits cyclical variation. The present paper analyzes how such risk fluctuations affect business cycles using a heterogeneous-agent model with uninsured idiosyncratic wage risk and indivisible labor. I introduce risk fluctuations as uncertainty shocks and calibrate those shocks to the U.S. micro-level wage data.When moved by both uncertainty and aggregate TFP shocks, the model generates a weakly negative correlation between total hours worked and average labor productivity and large fluctuations in the labor wedge close to those in the U.S. economy. Without uncertainty shocks, hours and productivity comove strongly and the labor wedge varies little.

Keywords: Uninsured idiosyncratic wage risk; Indivisible labor; Uncertainty shocks; Hours-productivity correlation; Labor wedge (search for similar items in EconPapers)
JEL-codes: E32 E24 D31 (search for similar items in EconPapers)
Pages: 58pages
Date: 2015-01
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
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