Kiel Working Papers, Kiel Institute for World Economics
No 1641:
The Vanishing Procyclicality of Labor Productivity
Jordi Galí and Thijs van Rens
Abstract: We document three changes in postwar US macroeconomic
dynamics: (i) the procyclicality of labor productivity has vanished, (ii)
the relative volatility of employment has risen, and (iii) the relative
(and absolute) volatility of the real wage has risen. We propose an
explanation for all three changes that is based on a common source: a
decline in labor market frictions. We develop a simple model with labor
market frictions, variable effort, and endogenous wage rigidities to
illustrate the mechanisms underlying our explanation. We show that the
reduction in frictions may also have contributed to the observed decline in
output volatility
Keywords: labor hoarding, labor market frictions, wage rigidities, effort choice; (follow links to similar papers)
JEL-Codes: E24,; E32; (follow links to similar papers)
51 pages, August 2010
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