Labor Markets and Business Cycles

Labor Markets and Business Cycles

Labor Markets and Business Cycles

Labor Markets and Business Cycles


Labor Markets and Business Cycles integrates search and matching theory with the neoclassical growth model to better understand labor market outcomes. Robert Shimer shows analytically and quantitatively that rigid wages are important for explaining the volatile behavior of the unemployment rate in business cycles.

The book focuses on the labor wedge that arises when the marginal rate of substitution between consumption and leisure does not equal the marginal product of labor. According to competitive models of the labor market, the labor wedge should be constant and equal to the labor income tax rate. But in U. S. data, the wedge is strongly countercyclical, making it seem as if recessions are periods when workers are dissuaded from working and firms are dissuaded from hiring because of an increase in the labor income tax rate. When job searches are time consuming and wages are flexible, search frictions--the cost of a job search--act like labor adjustment costs, further exacerbating inconsistencies between the competitive model and data. The book shows that wage rigidities can reconcile the search model with the data, providing a quantitatively more accurate depiction of labor markets, consumption, and investment dynamics.

Developing detailed search and matching models, Labor Markets and Business Cycles will be the main reference for those interested in the intersection of labor market dynamics and business cycle research.


The Center for Research in International Economics (CREI) aims to deepen our understanding of the global forces that shape modern economies. crei was founded in 1994 with support from the Generalitat de Catalunya and Universitat Pompeu Fabra (UPF). It is dedicated to generating research of the highest quality, in all areas of macroeconomics— ranging from growth, international finance, business cycles, the study of labor markets, and monetary economics to trade, development, and international economic history.

The crei Lectures in Macroeconomics will present new work by young but already distinguished scholars, whose recent contributions have already had a substantial impact on the profession. Authors will be prominent contributors to areas of economics that have attracted a good deal of attention recently. the goal is that scholars delivering the crei Lectures offer a synthesis of their thinking on one of the key research challenges facing the profession. Books in this series are aimed at graduate students and researchers in macroeconomics, broadly defined.

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.