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Resurrecting the Role of the Product Market Wedge in Recessions

Author

Listed:
  • Mark Bils
  • Peter J. Klenow
  • Benjamin A. Malin
Abstract
Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The labor wedge can be broken into a price markup and a wage markup. Based on the wages of employees, the literature has attributed the labor wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Any observed cyclicality in wedges calculated for these inputs cannot reflect wage markups. Looking at the past quarter century in the U.S. — including the Great Recession and its aftermath — we find that price markup movements are at least as important as wage markup movements. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

Suggested Citation

  • Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2014. "Resurrecting the Role of the Product Market Wedge in Recessions," NBER Working Papers 20555, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20555
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    References listed on IDEAS

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    More about this item

    JEL classification:

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

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