Working Paper: NBER ID: w19015
Authors: Loukas Karabarbounis
Abstract: Do fluctuations of the labor wedge, defined as the gap between the firm's marginal product of labor (MPN) and the household's marginal rate of substitution (MRS), reflect fluctuations of the gap between the MPN and the real wage or fluctuations of the gap between the real wage and the MRS? For many countries and most forcefully for the United States, fluctuations of the labor wedge predominantly reflect fluctuations of the gap between the real wage and the MRS. As a result, business cycle theories of the labor wedge should primarily focus on improving the household side of the labor market. Explanations of the labor wedge based on departures of the representative firm's MPN from the real wage are rejected by the data because the labor share of income is not strongly procyclical.
Keywords: No keywords provided
JEL Codes: E2; E20; E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real wage (J31) | labor wedge (J39) |
| measured MRS (C30) | labor wedge (J39) |
| measured MPN (C39) | labor wedge (J39) |
| household dynamics (J12) | labor wedge (J39) |
| firm dynamics (D21) | labor wedge (J39) |