Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations

54 Pages Posted: 28 Oct 1996 Last revised: 4 Oct 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)

Date Written: August 1996

Abstract

Using data for the G7 countries, I estimate conditional correlations of employment and productivity, based on a decomposition of the two series into technology and non-technology components. The picture that emerges is hard to reconcile with the predictions of the standard Real Business Cycle model. For a majority of countries the following results stand out: (a) technology shocks appear to induce a negative comovement between productivity and employment, counterbalanced by a positive comovement generated by demand shocks, (b) the impulse responses show a persistent decline of employment in response to a positive technology shock, and (c) measured productivity increases temporarily in response to a positive demand shock. More generally, the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major postwar cyclical episodes. A simple model with monopolistic competition, sticky prices, and variable effort is shown to be able to account for the empirical findings.

Suggested Citation

Gali, Jordi, Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations (August 1996). NBER Working Paper No. w5721. Available at SSRN: https://ssrn.com/abstract=3443

Jordi Gali (Contact Author)

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