The Labor Wedge and Business Cycle in Chile

Produced by: 
Banco Central de Chile
Available from: 
April 2015
Paper author(s): 
David Coble (University of Chicago)
Sebastián Faúndez (Banco Central de Chile)

Recent studies have documented the importance of the labor wedge in accounting for the level of business cycle fluctuations in Chile. None of these papers, however, extensively studies the labor wedge fluctuations and its possible sources. This paper takes a closer look at the labor wedge in Chile, with special emphasis on its cyclicality. We use a flexible model to implicitly derive the Frisch elasticity of labor, and construct a set of labor wedges. We 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 components: the firm's and the household's. We find that household component is the main driver of Chilean labor market fluctuations.


Research section: 
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