On the welfare cost of business cycles: The role of labor-market heterogeneity

Jaehun Jeong, Myungkyu Shim

Research output: Contribution to journalArticlepeer-review


Are business cycles equally beneficial or harmful to consumers? Has welfare inequality increased or decreased due to rise of income/wealth inequality? By utilizing a heterogeneous agent RBC model with endogenous labor supply, this paper aims to answer these questions. We first show that while technology-driven business cycles are beneficial on average, a finding that is consistent with the recent literature, the welfare gain is not equally distributed; it is beneficial (resp. harmful) for agents who are relatively rich (resp. poor). The key to understanding the monotonic relationship between welfare gain from the business cycles and wealth level, a finding different from the previous literature that argues that there is a non-monotonic relationship between the two, is shown to be endogenous labor supply. Finally, we analyze the short run consequence of rising income/wealth inequality on welfare cost.

Original languageEnglish
Article number103456
JournalJournal of Macroeconomics
Publication statusPublished - 2022 Sept

Bibliographical note

Funding Information:
We appreciate an anonymous referee and the co-editor (Ping Wang) for their valuable comments. We would like to appreciate Kwang Hwan Kim for his constructive comments and thank seminar participants at the Bank of Korea and Yonsei Macro Reading Group. Seoyoon Jeong provided superb research assistance. This research was supported by the Yonsei Signature Research Cluster Program of 2021, South Korea ( 2021-22-0011 ).

Publisher Copyright:
© 2022 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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