Working Paper: CEPR ID: DP7962
Authors: Karel Mertens; Morten O. Ravn
Abstract: A number of empirical studies find that permanent technological improvements give rise to a temporary drop in hours worked. This finding seriously questions the technology-driven business cycle hypothesis. In this paper we argue that it is important to control for permanentchanges in taxes, which invalidate the standard long run identifying assumptions for technology shocks and induce low frequency fluctuations in hours worked. Using the narrative data of Romer and Romer (2010), we find that tax shocks have significant long run effects on aggregatehours, output and labor productivity. We also find that, after controlling for tax shocks, permanent shocks to labor productivity generate short run increases in hours worked and are an important source of fluctuations in US output.
Keywords: business cycles; hours worked; tax shocks; technology shocks
JEL Codes: E2; E31; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technology shocks (O33) | Hours worked (J22) |
| Tax shocks (H26) | Hours worked (J22) |
| Tax shocks (H26) | Labor productivity (O49) |
| Technology shocks (O33) | Labor productivity (O49) |
| Tax shocks (H26) | Technology shocks (O33) |
| Hours worked (J22) | Labor productivity (O49) |
| Tax shocks (H26) | Business cycle fluctuations (E32) |