Technology-Hours Redux: Tax Changes and the Measurement of Technology Shocks

47 Pages Posted: 24 Aug 2010

See all articles by Karel Mertens

Karel Mertens

Federal Reserve Banks - Federal Reserve Bank of Dallas

Morten O. Ravn

European University Institute - Economics Department (ECO); London Business School - Department of Economics; University of Southampton; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: August 2010

Abstract

A number of empirical studies find that permanent technological improvements give rise to a temporary drop in hours worked. This finding seriously questions the technology-driven business cycle hypothesis. In this paper we argue that it is important to control for permanent changes in taxes, which invalidate the standard long run identifying assumptions for technology shocks and induce low frequency fluctuations in hours worked. Using the narrative data of Romer and Romer (2010), we find that tax shocks have significant long run effects on aggregate hours, output and labor productivity. We also find that, after controlling for tax shocks, permanent shocks to labor productivity generate short run increases in hours worked and are an important source of fluctuations in US output.

Keywords: business cycles, hours worked, tax shocks, technology shocks

JEL Classification: E2, E31, H3

Suggested Citation

Mertens, Karel and Ravn, Morten O., Technology-Hours Redux: Tax Changes and the Measurement of Technology Shocks (August 2010). CEPR Discussion Paper No. DP7962, Available at SSRN: https://ssrn.com/abstract=1661565

Karel Mertens (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

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Morten O. Ravn

European University Institute - Economics Department (ECO) ( email )

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