Labor-Market Wedge under Engel Curve Utility: Cyclical Substitution between Necessities and Luxuries

Chang, Yongsung; Hornstein, Andreas; Karabarbounis, Marios

doi:10.21144/eq1060101

Journal Article

Labor-Market Wedge under Engel Curve Utility: Cyclical Substitution between Necessities and Luxuries

Abstract: In booms, households substitute luxuries for necessities, e.g., food away from home for food at home. This cyclical pattern of composition changes in the consumption basket has the potential to reduce the volatility of measures of the labor-market wedge, the gap between the marginal rate of substitution and the real wage. Based on household expenditure patterns from the Consumer Expenditure Survey, we show that this composition bias has only a limited impact on the measured labor-market wedge, accounting for 6 percent to 16 percent of its cyclical volatility.

Keywords: Labor market; Marginal rate; Wages;

https://doi.org/10.21144/eq1060101