Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment
AbstractChang 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.
CitationTakahashi, 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
- 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