Working Paper: CEPR ID: DP1499
Authors: Jordi Gali
Abstract: Using data for the G7 countries, conditional correlations of employment and productivity are estimated, 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 in 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 post-war cyclical episodes. A simple model with monopolistic competition, sticky prices and variable effort is shown to be able to account for the empirical findings.
Keywords: business cycles; real business cycle models; new keynesian models; sticky prices; structural vector autoregression
JEL Codes: E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technology shocks (O33) | Employment (J68) |
| Technology shocks (O33) | Productivity (O49) |
| Demand shocks (E39) | Employment (J68) |
| Demand shocks (E39) | Productivity (O49) |
| Technology shocks (O33) | Negative comovement between Productivity and Employment (E24) |
| Demand shocks (E39) | Positive comovement between Productivity and Employment (O49) |