Abstract

http://ssrn.com/abstract=1707895
 
 

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The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours


Luca Sala


University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Ulf Söderström


Central Bank of Sweden - Research Department

Antonella Trigari


Bocconi University - Department of Economics

September 2010

CEPR Discussion Paper No. DP8005

Abstract:     
We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and efficient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inefficient allocation of labor. (ii) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the efficiency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.

Number of Pages in PDF File: 69

Keywords: Business cycles, Efficiency, Labor markets, Monetary policy

JEL Classification: E24, E32, E52

working papers series


Date posted: November 14, 2010  

Suggested Citation

Sala, Luca and Söderström, Ulf and Trigari, Antonella, The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours (September 2010). CEPR Discussion Paper No. DP8005. Available at SSRN: http://ssrn.com/abstract=1707895

Contact Information

Luca Sala (Contact Author)
University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )
Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)
Ulf Söderström
Central Bank of Sweden - Research Department ( email )
Stockholm, 103 37
Sweden
+46 8 787 0829 (Phone)
+46 8 21 05 31 (Fax)
HOME PAGE: http://www.riksbank.se/research/soderstrom
Antonella Trigari
Bocconi University - Department of Economics ( email )
Via Gobbi 5
Milan, 20136
Italy
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References:  49
Citations:  7

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