Resurrecting the Role of the Product Market Wedge in Recessions

Abstract

Employment and hours are more cyclical than dictated by productivity and consumption. This intratemporal labor wedge can arise from product or labor market distortions. Based on employee wages, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because wages may be smoothed versions of labor's true cyclical price, we instead examine the self-employed and intermediate inputs, respectively. For recent decades in the United States, we find price markup movements are at least as cyclical as wage markup movements. Thus, countercyclical price markups deserve a central place in business-cycle research, alongside sticky wages and matching frictions. (JEL E24, E32, E63, J31, J41)