Working Paper: CEPR ID: DP3212
Authors: Jordi Gal; Mark Gertler; Jose David López-Salido
Abstract: In this Paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as ?the gap?, into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar US data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.
Keywords: business cycles; countercyclical markups; welfare costs
JEL Codes: E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| business cycles (E32) | inefficient resource allocation (D61) |
| inefficiency gap (D61) | inefficient employment allocation (J68) |
| wage markup (J31) | inefficiency gap (D61) |
| procyclical movements in inefficiency gap (E32) | countercyclical movements in wage markup (E31) |
| business cycles (E32) | fluctuations in inefficiency gap (D61) |