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Convergence in Macroeconomics: The Labor Wedge

Convergence in Macroeconomics: The Labor Wedge 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 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Convergence in Macroeconomics: The Labor Wedge

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Publisher
American Economic Association
Copyright
Copyright © 2009 by the American Economic Association
Subject
Symposium
ISSN
1945-7715
eISSN
1945-7715
DOI
10.1257/mac.1.1.280
Publisher site
See Article on Publisher Site

Abstract

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 )

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jan 1, 2009

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