Search Frictions and the Labor Wedge

Author/Editor:

Murat Tasci ; Andrea Pescatori

Publication Date:

May 1, 2011

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2011/117

Subject:

Business cycles Economic growth Employment Labor Labor market frictions Labor markets

English

Publication Date:

May 1, 2011

ISBN/ISSN:

9781455262403/1018-5941

Stock No:

WPIEA2011117

Pages:

29

Please address any questions about this title to publications@imf.org