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Technology Shocks and Labor Market Dynamics: Some Evidence and Theory

37 Pages Posted: 14 Jan 2006  

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Louis Phaneuf

Universite du Quebec a Montreal; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Date Written: November 30, 2005

Abstract

We study the effects of technology shocks on labor market dynamics. We provide evidence that a positive technology shock leads to a weak response in nominal wage inflation, a modest decline in price inflation, and a modest rise in the real wage on impact and a permanent rise in the long run. The same shock may lead to a rise or fall in per capita hours, depending on whether hours enter the empirical model in levels or in differences. But the dynamic behaviors of wages and prices are robust across our alternative empirical specifications. We examine what theories may be able to explain the evidence. After arguing that a standard RBC model and its variants fail to explain the evidence about wages and prices, we show that, under plausible parameter values, a pure sticky-price model does not succeed either. However, a model with both nominal wage and price rigidities can be more successful. On this ground, we argue that to explain the effects of technology shocks on labor market dynamics may call for a significant departure from the traditional RBC paradigm.

Keywords: Technology Shock, Employment, Wages, Prices, Business Cycle

JEL Classification: E31, E32, E52

Suggested Citation

Liu, Zheng and Phaneuf, Louis, Technology Shocks and Labor Market Dynamics: Some Evidence and Theory (November 30, 2005). Available at SSRN: https://ssrn.com/abstract=875144 or http://dx.doi.org/10.2139/ssrn.875144

Zheng Liu (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Louis Phaneuf

Universite du Quebec a Montreal ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
514-987-6181 (Phone)

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

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