The Vanishing Procyclicality of Labor Productivity

44 Pages Posted: 2 Aug 2010

See all articles by Jordi Galí

Jordi Galí

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)

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Abstract

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.

Keywords: wage rigidities, labor market frictions, labor hoarding, effort choice

JEL Classification: E24, E32

Suggested Citation

Gali, Jordi and van Rens, Thijs, The Vanishing Procyclicality of Labor Productivity. IZA Discussion Paper No. 5099, Available at SSRN: https://ssrn.com/abstract=1651744

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
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+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Thijs Van Rens

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www.thijsvanrens.com

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/profile?key=3806

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