TY - BOOK ID - 85502380 TI - What Prevents a Real Business Cycle Model from Matching the U.S. Data? Decomposing the Labor Wedge PY - 2017 SN - 1484319125 1484319109 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Labor KW - Macroeconomics KW - Price Level KW - Inflation KW - Deflation KW - Business Fluctuations KW - Cycles KW - Prices, Business Fluctuations, and Cycles: Forecasting and Simulation KW - Energy: Demand and Supply KW - Prices KW - Energy and the Macroeconomy KW - Wages, Compensation, and Labor Costs: General KW - Unemployment: Models, Duration, Incidence, and Job Search KW - Demand and Supply of Labor: General KW - Labor Economics: General KW - Labor Demand KW - Labour KW - income economics KW - Wages KW - Unemployment rate KW - Labor supply KW - Labor share KW - Labor demand KW - Unemployment KW - Labor market KW - Labor economics KW - United States UR - https://www.unicat.be/uniCat?func=search&query=sysid:85502380 AB - I carry out a business cycle accounting exercise (Chari, Kehoe and McGrattan, 2007) on the U.S. data measured in wage units (Farmer (2010)) for the entire postwar period. In contrast to a conventional approach, this approach preserves common medium-term business cycle fluctuations in GDP, its components and the unemployment rate. Additionally, it facilitates decomposition of the labor wedge into the labor supply and the labor demand wedges. Using this business cycle accounting methodology, I find that in the transformed data, most movements in GDP are accounted for by the labor supply wedge. Therefore, I reverse a key finding of the real business cycle literature which asserts that 70% or more of economic fluctuations can be explained by TFP shocks. In other words, the real business cycle model fits the data badly because the assumption that households are on their labor supply equation is flawed. This failure is masked by data that has been filtered with a conventional approach that removes fluctuations at medium frequencies. My findings are consistent with the literature on incomplete labor markets. ER -