This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. December 2007
  5. Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations

Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations

  • Yongsung Chang
  • Sun-Bin Kim
American Economic Review
vol. 97, no. 5, December 2007
(pp. 1939-1956)
Download Full Text PDF

Abstract

We demonstrate that aggregate employment and consumption can increase without a corresponding movement in productivity in a model with heterogeneous agents where the only aggregate disturbance is a productivity shock. The interaction between incomplete capital markets and indivisible labor results in a low employment-productivity correlation and creates a time-varying wedge between the marginal rate of substitution (for commodity consumption and hours) and productivity. Our results caution against viewing the measured wedge as an inefficiency due to a failure of labor-market clearing or as a fundamental driving force behind business cycles. (JEL D31, E32, J22, J24, J31)

Citation

Chang, Yongsung, and Sun-Bin Kim. 2007. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations." American Economic Review, 97 (5): 1939-1956. DOI: 10.1257/aer.97.5.1939

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