Resurrecting the Role of the Product Market Wedge in Recessions

Mark Bils, Peter J. Klenow, Benjamin A. Malin

NBER Working Paper No. 20555
Issued in October 2014, Revised in November 2017
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The labor wedge can be broken into a price markup and a wage markup. Based on the wages of employees, the literature has attributed the labor wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Any observed cyclicality in wedges calculated for these inputs cannot reflect wage markups. Looking at the past quarter century in the U.S. — including the Great Recession and its aftermath — we find that price markup movements are at least as important as wage markup movements. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

download in pdf format
   (608 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20555

Published: Bils, Mark, Peter J. Klenow, and Benjamin A. Malin. 2018. "Resurrecting the Role of the Product Market Wedge in Recessions." American Economic Review, 108 (4-5): 1118-46. DOI: 10.1257/aer.20151260

Users who downloaded this paper also downloaded* these:
Bils, Klenow, and Malin Testing for Keynesian Labor Demand
Benigno, Eggertsson, and Romei w20556 Dynamic Debt Deleveraging and Optimal Monetary Policy
Hamermesh and Stancanelli w20449 Long Workweeks and Strange Hours
Rotemberg and Woodford w6909 The Cyclical Behavior of Prices and Costs
Pritchett and Summers w20573 Asiaphoria Meets Regression to the Mean
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us