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Title:Labor supply heterogeneity and macroeconomic comovement PDF Logo
Authors:Eusepi, Stefano
Preston, Bruce
Issue Date:2009
Series/Report no.:Staff Report, Federal Reserve Bank of New York 399
Abstract:Standard real business cycle models must rely on total factor productivity (TFP) shocks to explain the observed comovement of consumption, investment, and hours worked. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption can generate comovement in the absence of TFP shocks. Intertemporal substitution of goods and leisure induces comovement over the business cycle through heterogeneity in the consumption behavior of employed and unemployed workers. This result owes to two model features introduced to capture important characteristics of U.S. labor market data. First, individual consumption is affected by the number of hours worked: Employed agents consume more on average than the unemployed do. Second, changes in the employment rate, a central factor explaining variation in total hours, affect aggregate consumption. Demand shocks - such as shifts in the marginal efficiency of investment, as well as government spending shocks and news shocks - are shown to generate economic fluctuations consistent with observed business cycles.
Subjects:Business cycles
demand shocks
heterogeneity
labor market dynamics
JEL:E13
E24
E32
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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