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

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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)
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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