Technology Shocks and Labor Market Dynamics: Some Evidence and Theory

Abstract

We study the effects of technology shocks on labor market dynamics. We provide evidence that a positive technology shock leads to a weak response in nominal wage inflation, a modest decline in price inflation, and a modest rise in the real wage on impact and a permanent rise in the long run. The same shock may lead to a rise or fall in per capita hours, depending on whether hours enter the empirical model in levels or in differences. But the dynamic behaviors of wages and prices are robust across our alternative empirical specifications. We examine what theories may be able to explain the evidence. After arguing that a standard RBC model and its variants fail to explain the evidence about wages and prices, we show that, under plausible parameter values, a pure sticky-price model does not succeed either. However, a model with both nominal wage and price rigidities can be more successful. On this ground, we argue that to explain the effects of technology shocks on labor market dynamics may call for a significant departure from the traditional RBC paradigm.

Keywords: Technology Shock, Employment, Wages, Prices, Business Cycle

JEL Classification: E31, E32, E52