Wages, Business Cycles, and Comparative Advantage

The standard equilibrium models of business cycles face a puzzling fact that total hours vary greatly over the business cycle without much variation in aggregate wages. The model augments the standard RBC model to include Lucas span of control. Distinction between market and non-market and managerial and non-managerial work makes aggregate wages far less cyclical than individual wages. Cross-sectional comparative advantage between market and non-market sector in the workforce substantially increases the response of aggregate hours to shifts in relative productivity. As a result, the model provides a reconciliation between data and equilibrium macroeconomics