Jobless Recoveries and Time Variation in Labor Markets

Abstract

This paper studies the nature of time-variation in the relationship between labor market variables and output. Using a flexible time-varying-parameter vector autoregression model with stochastic volatility, we study changes in the relationship between output and different labor market variables. We find heterogeneity both in the timing and the type of changes. The responses of employment to output became weaker over time, primarily driven by the abrupt decline in economic volatility 1984-2007. On the other hand, the time-variability in the response of unemployment is primarily concentrated during periods of high volatility. Much more notably, the responses of hours and part-time employment to output have become stronger over time, and this relationship evolved gradually over time, indicating a shift towards utilization of the intensive margin and utilization of more flexible labor inputs.

Keywords: business cycles, employment, time-varying vector autoregression, jobless recovery

JEL Classification: E24, E32