Resurrecting the Role of the Product Market Wedge in Recessions

47 Pages Posted: 6 Oct 2014

See all articles by Mark Bils

Mark Bils

University of Rochester - Department of Economics; National Bureau of Economic Research (NBER)

Peter J. Klenow

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Ben Malin

Federal Reserve Bank of Minneapolis

Date Written: October 2014

Abstract

Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The labor wedge can be broken into a price markup and a wage markup. Based on the wages of employees, the literature has attributed the labor wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Any observed cyclicality in wedges calculated for these inputs cannot reflect wage markups. Looking at the past quarter century in the U.S. — including the Great Recession and its aftermath — we find that price markup movements are at least as important as wage markup movements. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

Suggested Citation

Bils, Mark and Klenow, Peter J. and Malin, Benjamin A., Resurrecting the Role of the Product Market Wedge in Recessions (October 2014). NBER Working Paper No. w20555. Available at SSRN: https://ssrn.com/abstract=2505860

Mark Bils (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627-0158
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter J. Klenow

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Benjamin A. Malin

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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