Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment | Zendy

Shuhei Takahashi | Zendy

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Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations: Comment

Author(s) -

Shuhei Takahashi

Publication year - 2014

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.104.4.1446

Subject(s) - economics , business cycle , volatility (finance) , productivity , econometrics , asset (computer security) , labor demand , aggregate (composite) , microeconomics , wage , labour economics , macroeconomics , materials science , computer security , computer science , composite material

Chang and Kim (2007) develop an incomplete asset markets model incorporating discrete labor supply and idiosyncratic labor productivity. Their results resolve long-standing puzzles for business cycle models. Specifically, they produce a low correlation between aggregate hours worked and labor productivity (0.23) and a labor wedge with 76 percent the volatility of output. I show that these results arise from errors in their computational method. I resolve their model using a corrected method and find a strong, positive correlation between hours and productivity (0.80). Fluctuations in the labor wedge decrease to 24 percent of those in output. (JEL D31, E32, J22, J24, J31)

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