American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Convergence in Macroeconomics: The Labor Wedge
American Economic Journal: Macroeconomics
vol. 1,
no. 1, January 2009
(pp. 280–97)
Abstract
I review research on the behavior of the labor wedge, the ratio between the marginal rate of substitution of consumption for leisure and the marginal product of labor. According to competitive, market-clearing macroeconomic models, the ratio is easy to measure and should be equal to the sum of consumption and labor taxes. The observation that the wedge is higher in continental Europe than in the United States has proved useful for understanding the extent to which taxes can explain differences in labor market outcomes. The observation that the ratio rises during recessions suggests some failure of competitive, market-clearing macroeconomic models at business cycle frequencies. The latter observation has guided recent research, including work on sticky wage models and job search models. (JEL E24, E32, J64)Citation
Shimer, Robert. 2009. "Convergence in Macroeconomics: The Labor Wedge." American Economic Journal: Macroeconomics, 1 (1): 280–97. DOI: 10.1257/mac.1.1.280Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
- E32 Business Fluctuations; Cycles
- J64 Unemployment: Models, Duration, Incidence, and Job Search
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