Labor Markets and Business Cycles by Shimer Robert;

Author:Shimer, Robert;
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2010-02-01T16:00:00+00:00

so, ignoring Jensen’s inequality, the average labor wedge satisfies

He would solve this equation for the disutility of work and conclude that = 0.451, which is higher than the true value of = 0.399. This is because he fails to realize that workers are unemployed not only because they have a taste for leisure but also because of search frictions.

The economist would also uncover movements in the labor wedge that are negatively correlated with the employment rate, as in the data. However, the size of these movements would be small. To see this, log-linearize around the stochastic steady state. From equation (3.30),

log = log 0.4 − 1.050(log n − log 0.95).

The economist would conclude that whenever employment is above its normal level, the labor wedge is roughly the same proportion below its normal level. This is broadly consistent with the evidence in table 1.1 when the elasticity of labor supply is infinite. Still, the fact that the model yields only very small movements in the employment rate implies that it yields equally small movements in the labor wedge. Both of these findings are inconsistent with the data. The search model with substitutability between consumption and leisure is a quantitative failure at explaining the behavior of the employment rate and the labor wedge.

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