Labour Supply Factors and Economic Fluctuations
50 Pages Posted: 10 Jun 2015
Date Written: April 10, 2015
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: Suggested Citation