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  3. American Economic Review
  4. April 2014
  5. Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment

Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment

  • Shuhei Takahashi
American Economic Review
vol. 104, no. 4, April 2014
(pp. 1446-60)
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Abstract

Chang and Kim (2007) develop an incomplete asset markets model incorporating discrete labor supply and idiosyncratic labor productivity. Their results resolve long-standing puzzles for business cycle models. Specifically, they produce a low correlation between aggregate hours worked and labor productivity (0.23) and a labor wedge with 76 percent the volatility of output. I show that these results arise from errors in their computational method. I resolve their model using a corrected method and find a strong, positive correlation between hours and productivity (0.80). Fluctuations in the labor wedge decrease to 24 percent of those in output.

Citation

Takahashi, Shuhei. 2014. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment." American Economic Review, 104 (4): 1446-60. DOI: 10.1257/aer.104.4.1446

Additional Materials

JEL Classification

  • D31 Personal Income, Wealth, and Their Distributions
  • E32 Business Fluctuations; Cycles
  • J22 Time Allocation and Labor Supply
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials