Peer-reviewed literature partially supports the effectiveness of real business cycle models incorporating indivisible labor in explaining aspects of aggregate fluctuations, such as employment variability, though comprehensive validation across all macroeconomic metrics is discussed with nuances.
Abstract
I suggest that the aggregate implications of indivisible labor are few, and subtle. First, I model behavior in an "indivisible labor" environment like those of Diamond and Mirrlees (1978, 1986), Hansen (1985), Rogerson (1988), Christiano and Eichenbaum (1992) and show how an inverse distribution function describing heterogeneity in the indivisible model is isomorphic with the marginal disutility schedule from the divisible labor model of Lucas and Rapping (1969). It follows that aggregate behavior in such an indivisible model is indistinguishable from aggregates generated by the divisible model; any data on aggregate hours and earnings generated by the divisible (indivisible) model can be generated by a similar parameterization of the indivisible (divisible) model. Second, I generalize the aforementioned models of indivisible labor to allow for labor supply on the "intensive" margin, and to allow for nonlinear taxes. The aggregate implications of doing the former are quite subtle, but doing the latter suggests that the indivisibility of labor may have implications for public finance. My results also imply that backward bending aggregate labor supply, and any nonnegative degree of aggregate intertemporal substitution, are consistent with standard economic theory even when all labor is supplied on the so-called "extensive" margin. Finally, my results suggest that the classic aggregate studies of labor supply by Mincer, Bowen and Finegan, and others have a simple microeconomic interpretation.
# Indivisible labor and the business cycle
Journal of Monetary Economics. Published: 1985-11-01. 2,035 citations.
## Authors
- Gary D. Hansen (University of California, Santa Barbara): h-index 23; 6,128 citations; corresponding author
## Topics
- Economic Growth and Productivity
- Fiscal Policy and Economic Growth
- Economic theories and models
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# INDIVISIBLE LABOR AND THE BUSINESS CYCLE
## Abstract
A growth model with shocks to technology is studied. Labor is indivisible, so all variability in hours worked is due to fluctuations in the number employed. We find that, unlike previous equilibrium models of the business cycle, this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity. This finding is independent of individuals' willingness to substitute leisure across time. This and other findings are the result of studying and comparing summary statistics describing this economy, an economy with divisible labor, and post-war U.S. time series. 'The data used for this analysis is available from the Bureau of Labor Statistics' Labstat data tape. The series I used were collected from households using the Current Population Surv
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