This paper investigates the claim that real business cycle models perform poorly in matching real-world aggregate labor market behavior because observed real wage payments do not correspond to the actual marginal productivity of labor but contain an insurance component not accounted for by the...

The traditional argument against the relevance of sector-specific shocks for the aggregate phenomenon of business cycles invokes the law of large numbers: positive shocks in some sectors are offset by negative shocks in other sectors. This paper hypothesizes that cancellation of sector-specific...