Working Paper

Heterogeneity and aggregation in the labor market : implications for aggregate preference shifts

Abstract: The cyclical behavior of hours of work, wages, and consumption does not conform with the prediction of the representative agent with standard preferences. The residual in the intra-temporal first-order condition for commodity consumption and leisure is often viewed as a failure of labor-market clearing. We show that a simple heterogeneous agent economy with incomplete markets and indivisible labor generates an aggregation error that looks much like the preference residual in aggregate data. Our results caution against viewing the preference residual as a failure of labor-market clearing or a fundamental driving force of business cycles.

Keywords: Labor market;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2004

Number: 03-17