Technology Shocks, Employment and Labour Market Frictions

Abstract:     
Recent empirical evidence suggests that a positive technology shock leads to a decline in labour inputs. However, the standard real business model fails to account for this empirical regularity. Can the presence of labour market frictions address this problem, without otherwise altering the functioning of the model? We develop and estimate a real business cycle model using Bayesian techniques that allows, but does not require, labour market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labour market frictions are the factor responsible for the negative response of employment.

Number of Pages in PDF File: 29

Keywords: Technology shocks, employment, labour market frictions

JEL Classification: E32

working papers series