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Search Frictions and the Labor Wedge
Author:
Mr. Murat Tasci
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Mr. Andrea Pescatori
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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 117
Language:
English
Publication Date:
01 May 2011
DOI:
https://doi.org/10.5089/9781455262403.001
ISBN:
9781455262403
ISSN:
1018-5941
Pages:
29
Keywords:
WP; business cycle; labor market; Labor Market Search; Business Cycle Accounting; Labor Wedge; prototype business cycle model; business cycle frequency; RBC model; prototype model; Frisch elasticity; accounting literature; wedge equation; utility function; labor demand and supply equation; employment fluctuation; Labor market frictions; Business cycles; Employment; Labor markets
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper shows that labor market search frictions do not explain fluctuations in the labor wedge per se. However, the introduction of extensive and intensive margin clarifies that measuring the MRS in terms of total hours artificially introduces procyclicality in the MRS. When the MRS is correctly measured in terms of hours per worker, the labor wedge obtained is less variable than the one of the competitive model. Finally, we show that it is possible to measure a strongly procyclical labor wedge when the actual data generating process is a search model that allows for movements in both margins.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund