Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Richmond
Working Paper
Labor-Market Wedge under Engel Curve Utility: Cyclical Substitution between Necessities and Luxuries
Yongsung Chang
Andreas Hornstein
Marios Karabarbounis
Abstract

In booms, households substitute luxuries for necessities, e.g., food away from home for food at home. Ignoring this cyclical pattern of composition changes in the consumption basket makes the labor-market wedge -- a measure of inefficiency that reflects the gap between the marginal rate of substitution and the real wage -- appear to be more volatile than it actually is. Based on the household expenditure pattern across 10 consumption categories in the Consumer Expenditure Survey, we show that taking into account these composition changes can explain 6-15% of the cyclicality in the measured labor-market wedge.


Download Full text
Cite this item
Yongsung Chang & Andreas Hornstein & Marios Karabarbounis, Labor-Market Wedge under Engel Curve Utility: Cyclical Substitution between Necessities and Luxuries, Federal Reserve Bank of Richmond, Working Paper 18-13, 19 Jul 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: economic fluctuations; equilibrium model; consumption
For corrections, contact Christian Pascasio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal