Standard heterogeneous agent macro models that highlight idiosyncratic productivity shocks do not generate the near zero cross-sectional correlation between hours and wages found in the data. We ask whether matching this moment matters for business cycle properties of these models. To do this we explore two extensions of the model in Chang et al. (2019) that can match this empirical cross-section correlation. One of these departs from the assumption of balanced growth preferences. The other introduces an idiosyncratic shock to the opportunity cost of market work that is highly correlated with the shock to market productivity. While both extensions can match the empirical correlation, they have large and opposing effects on the cyclical volatility of the labor market. We conclude that the cross-sectional moment is important for business cycle analysis and that more work is needed to distinguish the potential mechanisms that can generate it.
Bibliographical noteFunding Information:
We thank Hyun-Tae Kim and Hyun-Yeol Kim for excellent research assistance. We thank Micheal Keane and an anonymous referee for useful comments. This work is supported by grants from the National Research Foundation of Korea funded by the Korean Government (NRF-2016S1A5A2A03926178). Sun-Bin Kim is grateful to the ISER Osaka University for their hospitality and financial support while he was visiting.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics