The labor wedge and business cycles in Chile
Abstract
Recent studies have documented the importance of the labor wedge in accounting for the level of business cycle fluctuations in the Chilean economy. None of these papers, however, extensively studies the labor wedge fluctuations and its possible sources. In this paper we take a closer look at the labor wedge in Chile, with emphasis on its cyclicality.Using a flexible model to implicitly derive the Frisch elasticity of labor, we construct a set of labor wedges for the Chilean economy and find that the labor wedge in Chile is counter-cyclical. Finally,we show that the labor wedge can be written as the sum of two elements: the firm and the household components. We find that the household component is the main driver of Chilean labor market fluctuations.
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