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Labor Markets and Business Cycles by Robert Shimer

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1

The Labor Wedge

Throughout this book, I study the interaction of optimizing households and firms in a closed economy. I begin in this chapter by developing a competitive, representative-agent version of the model. The chapter has two objectives. First, I introduce much of the notation that I rely on throughout the book. Because of this, I include details in this chapter that are not really necessary for the second, more substantive objective: I use the model to measure and analyze the behavior of the labor wedge, the wedge between the marginal rate of substitution of consumption for leisure and the marginal product of labor. I confirm the well-known result that the labor wedge tends to rise during recessions, so the economy behaves as if there ...

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