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American Economic Journal: Macroeconomics: Vol. 1 No. 1 (January 2009)

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Convergence in Macroeconomics: The Labor Wedge

Article Citation

Shimer, Robert. 2009. "Convergence in Macroeconomics: The Labor Wedge." American Economic Journal: Macroeconomics, 1(1): 280-97.

DOI: 10.1257/mac.1.1.280

Abstract

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. (JEL E24, E32, J64)

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Authors

Shimer, Robert (U Chicago)

JEL Classifications

E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E32: Business Fluctuations; Cycles
J64: Unemployment: Models, Duration, Incidence, and Job Search

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