Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations

We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results i...

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Bibliographic Details
Published in:The American economic review 2007-12, Vol.97 (5), p.1939-1956
Main Authors: Chang, Yongsung, Kim, Sun-Bin
Format: Article
Language:English
Subjects:
Aggregation
Business cycles
Capital markets
Commodities
Consumption
Data aggregation
Economic fluctuations
Economic modeling
Economic models
Elasticity
Employment
Equilibrium
Government spending
Hours of work
Labor
Labor economics
Labor market
Labor productivity
Labor supply
Labour economics
Labour market
Macroeconomics
Nondurable goods
Preferences
Productivity
Steady state economies
Studies
Time series
Volatility
Wealth
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Summary:We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles. (JEL D31, E32, J22, J24, J31)
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.97.5.1939