The labor wedge: MRS vs. MPN

Research output: Contribution to journalArticlepeer-review

26 Scopus citations


Do fluctuations of the labor wedge, defined as the gap between the firm's marginal product of labor (MPN) and the household's marginal rate of substitution (MRS), reflect fluctuations of the gap between the MPN and the real wage or fluctuations of the gap between the real wage and the MRS? For many countries and most forcefully for the United States, fluctuations of the labor wedge predominantly reflect fluctuations of the gap between the real wage and the MRS. As a result, business cycle theories of the labor wedge should primarily focus on improving the household side of the labor market. Explanations of the labor wedge based on departures of the representative firm's MPN from the real wage are rejected by the data because the labor share of income is not strongly procyclical.

Original languageEnglish (US)
Pages (from-to)206-223
Number of pages18
JournalReview of Economic Dynamics
Issue number2
StatePublished - Apr 1 2014


  • Labor share
  • Labor wedge
  • Marginal product of labor
  • Marginal rate of substitution

Fingerprint Dive into the research topics of 'The labor wedge: MRS vs. MPN'. Together they form a unique fingerprint.

Cite this