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Time-Varying Wage Risk, Incomplete Markets, and Business Cycles

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  • Shuhei Takahashi

    (Institute of Economic Research, Kyoto University)

Abstract

Idiosyncratic wage risk exhibits cyclical variation. The present paper analyzes how such risk fluctuations affect business cycles using a heterogeneous-agent model with uninsured idiosyncratic wage risk and indivisible labor. I introduce risk fluctuations as uncertainty shocks and calibrate those shocks to the U.S. micro-level wage data.When moved by both uncertainty and aggregate TFP shocks, the model generates a weakly negative correlation between total hours worked and average labor productivity and large fluctuations in the labor wedge close to those in the U.S. economy. Without uncertainty shocks, hours and productivity comove strongly and the labor wedge varies little.

Suggested Citation

  • Shuhei Takahashi, 2015. "Time-Varying Wage Risk, Incomplete Markets, and Business Cycles," KIER Working Papers 912, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:912
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    3. Tatsuro Senga, 2014. "A New Look at Uncertainty Shocks: Imperfect Information and Misallocation," UTokyo Price Project Working Paper Series 042, University of Tokyo, Graduate School of Economics.
    4. Julia Thomas & Aubhik Khan, 2012. "Uncertainty Shocks in an Economy with Collateral Constraints," 2012 Meeting Papers 1075, Society for Economic Dynamics.

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    More about this item

    Keywords

    Uninsured idiosyncratic wage risk; Indivisible labor; Uncertainty shocks; Hours-productivity correlation; Labor wedge;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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