The Vanishing Procyclicality of Labor Productivity
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Thijs Van Rens
University of Warwick - Department of Economics; CEPR; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 5099
We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility.
Number of Pages in PDF File: 44
Keywords: wage rigidities, labor market frictions, labor hoarding, effort choice
JEL Classification: E24, E32working papers series
Date posted: August 2, 2010
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