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REAL WAGE RIGIDITY, HETEROGENEITY, AND THE BUSINESS CYCLES

Published online by Cambridge University Press:  31 October 2019

Eunseong Ma
Eunseong Ma*
Affiliation:
Louisiana State University
*
Address correspondence to: Eunseong Ma, Department of Economics, Louisiana State University, 2312 Business Education Complex South, 501 South Quad Drive, Baton Rouge, LA 70803, USA. e-mail: [email protected].
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Abstract

This paper investigates the quantitative implications of real wage rigidities and heterogeneity for two long-lasting puzzles in the business cycle literature: the low correlation between total hours worked and labor productivity and the large volatility of the labor wedge, defined as a gap between the marginal rate of substitution of aggregate leisure for aggregate consumption and the marginal product of aggregate labor. I shed light on these issues by extending a heterogeneous-agent model with an indivisible labor supply choice to real wage rigidities. I find that a small amount of real wage stickiness would be sufficient to resolve both anomalies when long-term wage contracts and heterogeneity are taken into account.

Keywords

Real Wage RigidityHeterogeneityLabor WedgeHours–Productivity Correlation
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1701 - 1725
Copyright
© Cambridge University Press 2019

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Footnotes

I am deeply indebted to Sarah Zubairy for her advice and suggestions. I would also like to thank the editor William A. Barnett and an anonymous referee for the insightful suggestions. For helpful comments and feedback, I wish to thank Yuzhe Zhang, Young-Geun Goh, Chen Yeh, and seminar or conference participants at Texas A&M University, the 80th Annual Meeting of the Midwest Economics Association, 2016 Spring Midwest Macro Meetings, and the 91st Annual Conference of the Western Economic Association International.

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