American Economic Review: Vol. 104 No. 4 (April 2014)

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

Article 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

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.

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Authors

Takahashi, Shuhei (Institute of Economic Research, Kyoto U)

JEL Classifications

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


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