Template-Type: ReDIF-Paper 1.0
Title: Is Household Heterogeneity Important for Business Cycles?
Author-Name: Youngsoo Jang
Author-Email: jangys724@gmail.com
Author-Name: Takeki Sunakawa
Author-Email: takeki.sunakawa@gmail.com
Author-Name: Minchul Yum
Author-Email:  minchul.yum@uni-mannheim.de
Classification-JEL: E32, E24, E21
Keywords: Heterogeneity, progressivity, government transfers, extensive margin labor supply, business cycles

Abstract: This paper explores how the interaction between household heterogeneity and progressive
government transfers shapes aggregate labor market ‡uctuations. Using a static model of the
extensive margin labor supply, we analytically show that greater progressivity in the transfer
system leads to greater volatility of low wage workers’ employment and less procyclical average
labor productivity. We then build a dynamic general equilibrium model with both idiosyncratic
and aggregate productivity shocks and show that household heterogeneity substantially shapes
the dynamics of macroeconomic aggregates when interacted with progressive transfers. Specifically, a notable feature of the performance of our heterogeneous-agent model is its ability to
reproduce moderately procyclical average labor productivity while retaining the success of the
representative-agent indivisible labor model in generating a large cyclical volatility of aggregate
hours relative to output. Finally, we document that among low-wage workers, (i) the individuallevel probability of adjusting labor supply along the extensive margin is signi…cantly higher, and
(ii) the fall in employment rate is considerably steeper during the last six recessions, both of
which support the key mechanism of our model.

Note: 
Length: 57
Creation-Date: 2019-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp085
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2019_085