Labour Supply Factors and Economic Fluctuations

50 Pages Posted: 10 Jun 2015

See all articles by Claudia Foroni

Claudia Foroni

Norges Bank

Francesco Furlanetto

Norges Bank

Antoine Lepetit

Paris School of Economics, Université Paris I Panthéon-Sorbonne

Date Written: April 10, 2015

Abstract

We propose a new VAR identification scheme that enables us to disentangle labor supply shocks from wage bargaining shocks. Identification is achieved by imposing robust signrestrictions that are derived from a New Keynesian model with endogenous labor force participation. According to our analysis on US data over the period 1985-2014, labor supply shocks and wage bargaining shocks are important drivers of output and unemployment both in the short run and in the long run. These results suggest that identification strategies used in estimated New Keynesian models to disentangle labor market shocks may be misguided. We also analyze the behavior of the labor force participation rate through the lenses of our model. We find that labor supply shocks are the main drivers of the participation rate and account for about half of its decline in the aftermath of the Great Recession.

Keywords: labor supply shocks, wage mark-up shocks, identification, VAR, labor force participation

JEL Classification: C11, C32, E32

Suggested Citation

Foroni, Claudia and Furlanetto, Francesco and Lepetit, Antoine, Labour Supply Factors and Economic Fluctuations (April 10, 2015). Norges Bank Working Paper 07 | 2015. Available at SSRN: https://ssrn.com/abstract=2616782 or http://dx.doi.org/10.2139/ssrn.2616782

Claudia Foroni (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Francesco Furlanetto

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Antoine Lepetit

Paris School of Economics, Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

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