Working Paper: CEPR ID: DP9853
Authors: Jordi Gal; Thijs van Rens
Abstract: We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity vanished, (ii) the relative volatility of employment rose, and (iii) the relative (and absolute) volatility of the real wage rose. We propose an explanation for all three changes that is based on a common source: the decline in labor market turnover, which reduced hiring frictions. We develop a simple model with hiring frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the decline in turnover may also have contributed to the observed decline in output volatility.
Keywords: effort choice; hiring frictions; labor hoarding; labor market turnover; wage rigidities
JEL Codes: E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in labor market turnover (J63) | Changes in labor productivity (O49) |
| Decline in labor market turnover (J63) | Changes in employment volatility (J63) |
| Decline in labor market turnover (J63) | Changes in wage volatility (J39) |
| Decline in labor market turnover (J63) | Increased sensitivity of wage adjustments to economic conditions (J39) |
| Decline in labor market turnover (J63) | Changes in macroeconomic dynamics (E39) |
| Changes in labor productivity (O49) | Decline in procyclicality of labor productivity (O49) |
| Increased employment volatility (J63) | Changes in labor input management by firms (J29) |
| Changes in wage volatility (J39) | Increased sensitivity of wage adjustments (J39) |