The Labor Wedge: Mrs vs. Mpn

46 Pages Posted: 4 May 2013 Last revised: 17 Jun 2023

See all articles by Loukas Karabarbounis

Loukas Karabarbounis

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2013

Abstract

Do fluctuations of the labor wedge, defined as the gap between the firm's marginal product of labor (MPN) and the household's marginal rate of substitution (MRS), reflect fluctuations of the gap between the MPN and the real wage or fluctuations of the gap between the real wage and the MRS? For many countries and most forcefully for the United States, fluctuations of the labor wedge predominantly reflect fluctuations of the gap between the real wage and the MRS. As a result, business cycle theories of the labor wedge should primarily focus on improving the household side of the labor market. Explanations of the labor wedge based on departures of the representative firm's MPN from the real wage are rejected by the data because the labor share of income is not strongly procyclical.

Suggested Citation

Karabarbounis, Loukas, The Labor Wedge: Mrs vs. Mpn (May 2013). NBER Working Paper No. w19015, Available at SSRN: https://ssrn.com/abstract=2260654

Loukas Karabarbounis (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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