Heterogeneity and Aggregation in the Labor Market: Implications for Aggregate Preference Shifts

Macroeconomics from University Library of Munich, Germany

Abstract: The cyclical behavior of hours worked, wages, and consumption does not conform with the prediction of the representative agent with standard preferences. The residual in the intra-temporal first-order condition for commodity consumption and leisure is often viewed as a failure of labor-market clearing. We show that a simple heterogeneous-agent economy with incomplete markets and indivisible labor generates an aggregation error that looks much like the preference residual in the data. Our results caution against viewing the preference residual as a failure of labor-market clearing or a fundamental driving force of business cycles.

Keywords: Aggregation; Heterogeneity; Incomplete Market; Aggregate Preference Shifts (search for similar items in EconPapers)
JEL-codes: E24 E32 J21 J22 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-02-11
New Economics Papers: this item is included in nep-lab
Note: Type of Document - pdf; prepared on win98; pages: 30
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Related works:
Working Paper: Heterogeneity and aggregation in the labor market: implications for aggregate preference shifts (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0402024

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