Search frictions do not fully explain labour wedge: IMF paper

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Labour market search frictions alone do not explain fluctuations in the labour wedge observed in models of labour markets, an International Monetary Fund paper, published in May, says.

Andrea Pescatori and Murat Tasci, the paper's authors, use a real business cycle model to examine whether a labour wedge – measured as the equilibrium point where the marginal rate of substitution of consumption and leisure meets the marginal productivity of labour – is a source of labour market search frictions.

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