Working Paper: CEPR ID: DP18389
Authors: Vivien Lewis; Stefania Villa
Abstract: Labor productivity is highly procyclical in the Euro Area. We investigate the sources of this procyclicality in an estimated New Keynesian business cycle model with labor search frictions and variable factor utilization in both capital and labor. Labor input can vary along three margins: employment, hours, and effort (or utilization). We find evidence for a significant use of the effort margin in labor adjustment. Moreover, a model with effort outperforms one with variable capital utilization or dominant technology shocks. Finally, the effort margin dampens inflation volatility.
Keywords: Labor Productivity; Effort; Inflation
JEL Codes: E24; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor Productivity (O49) | Effort Margin (D22) |
| Effort Margin (D22) | Inflation Volatility (E31) |
| Effort Margin (D22) | Labor Productivity (O49) |
| Effort Margin (D22) | Model Fit (C52) |
| Labor Productivity (O49) | Output Fluctuations (E32) |