Convergence in Macroeconomics: The Labor Wedge

I review research on the behavior of the labor wedge, the ratio between the marginal rate of substitution of consumption for leisure and the marginal product of labor. According to competitive, market-clearing macroeconomic models, the ratio is easy to measure and should be equal to the sum of consu...

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Bibliographic Details
Published in:American economic journal. Macroeconomics 2009-01, Vol.1 (1), p.280-297
Main Author: Shimer, Robert
Format: Article
Language:English
Subjects:
Business cycles
Consumption
Consumption taxes
Convergence
Economic fluctuations
Economic models
Economic recessions
Employment
Expected utility
Households
Income taxes
Labor
Labor market
Labor markets
Labor supply
Labor supply elasticity
Macroeconomic modeling
Macroeconomics
Recessions
Studies
Symposium
Tax increases
Tax rates
Taxes
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Summary:I review research on the behavior of the labor wedge, the ratio between the marginal rate of substitution of consumption for leisure and the marginal product of labor. According to competitive, market-clearing macroeconomic models, the ratio is easy to measure and should be equal to the sum of consumption and labor taxes. The observation that the wedge is higher in continental Europe than in the United States has proved useful for understanding the extent to which taxes can explain differences in labor market outcomes. The observation that the ratio rises during recessions suggests some failure of competitive, market-clearing macroeconomic models at business cycle frequencies. The latter observation has guided recent research, including work on sticky wage models and job search models.
ISSN:1945-7707
1945-7715
DOI:10.1257/mac.1.1.280