the labour market over the business cycle can theory fit the facts we examine the ability of six labour market models to account for the business cycle behaviour of uk labour markets when embedded in a stochastic growth model we assess the models in terms of i their ability to mimic general business cycle correlations and volatility ii their success at explaining the persistence of labour market fluctuations and iii whether the models can explain why the growth and speed of adjustment of labour market variables changes between periods of expansions and contractions the main success of the models is the ability to broadly account for business cycle correlations and co movements and the changes in employment unemployment growth rates between expansions and contractions however there are three main failures a the models tend to produce insufficiently volatile employment and unemployment fluctuations b the models tend to produce too strong a correlation between wages and employment c most of the models generate only brief temporary deviations in unemployment in response to shocks rather than the protracted dynamics of the data

the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

the demographic deficit abstract there has been a slowdown in growth in the world s most advanced economies in this paper we argue that changing demographics in particular aging populations combined with increased life expectancy may be part of the explanation for why we observe slower growth falling interest rates and falling productivity growth using japan and the u s in the years prior to the financial crises as a case study we provide estimates of the growth deficit that arises from an aging cohort structure and increasing life expectancy we also provide projections of the impact of predictable demographic changes on future growth in the u s and japan

home production and social security reform this paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study social se curity reforms as such the model dierentiates both consumption goods and labor eort according to their respective roles in home production and market activities using a calibrated model we nd that eliminating the current pay as you go social security system has important implications for both labor supply and consumption decisions and that these decisions are in uenced by the presence of a home production technology comparing our benchmark economy to one with dierentiated goods but no home production we nd that eliminating social security bene ts generates larger welfare gains in the presence of home produc tion this result is due to the self insurance aspects generated by the presence of home production comparing our economy to a one good economy without home production we show that the welfare gains of eliminating social security are magni ed even further these policy analyses suggest the importance of mod eling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production

estimating griliches k shifts griliches k shift a crucial parameter in the welfare evaluation of technological change is shown to be equal to the radial rate of technological change plus a vector of commodity bias parameters obtained from the distance function the analysis permits decomposition of sectoral productivity growth into productivity growth by commodity the k shifts estimated for wheat corn soybeans and beef in u s agriculture indicate a decrease in the marginal cost of production of corn soybeans and wheat during the 1950 1993 years

the brevity and violence of contractions and expansions abstract early studies of business cycles argued that contractions in economic activity were briefer shorter and more violent rapid than expansions this paper systematically investigates this claim and in the process discovers a robust new business cycle fact contractions in employment are briefer and more violent than expansions but we cannot reject the null of equal brevity and violence for expansions and contractions in output the difference arises because employment typically lags output around peaks but they coincide in their troughs we discuss the performance of existing business cycle models in accounting for this fact and conclude that none can fully account for it we then show that a business cycle model with asymmetric adjustment costs on employment and a choice of when to scrap old technologies can account for the business cycle fact both qualitatively and quantitatively

2018 klein lecture individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we study business cycle fluctuations in heterogeneous agent general equilibrium models featuring intensive and extensive margins of labor supply a nonlinear mapping from time devoted to work to labor services generates operative extensive and intensive margins our model captures the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we study how various specifications influence labor supply responses to aggregate technology shocks and find that abstracting from intensive margin adjustment can have large effects on the volatility of aggregate hours even if fluctuations along the intensive margin are small

weekly employee hours weeks worked and intertemporal substitution abstract we show that the representative consumer model fits the aggregate consumption and employment data well if a choice of work is allowed both at the intensive and extensive margins the structural preference parameters recovered from the estimation of the euler equations of the model are economically meaningful and the null hypothesis of the overidentifying restrictions implied by our model is far from being rejected we find that the shares in preferences associated with leisure time in the weeks off and in the workweeks are quite large and about equal our estimates also uncover relatively large intertemporal substitution elasticities

money and the business cycle with one period nominal contracts a modified version of the nominal contract developed by j a gray 1976 and s fischer 1977 is introduced in a general equilibrium model with money which has been used in the real business cycle literature money is introduced in the model through cash in advance constraint two kinds of contracts are examined namely a nominal wage contract and a nominal price contract the nominal wage contract improves the fit of the model in many respects the nominal price contract increases the output volatility enormously but it has some unrealistic features

wage rigidity and job creation recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations we use worker level data from the cps to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions the wage of new hires unlike the aggregate wage is volatile and responds almost one to one to changes in labor productivity we conclude that there is little evidence for wage rigidity in the data

tournaments as a worker discipline device c c yang i introduction in the absence of unemployment a worker caught shirking and subsequently fired could obtain a new job at the market wage without difficulty as a result of this and the imperfect monitoring of workers on the job effort shapiro and stiglitz 1984 argued that there must be involuntary unemployment in equilibrium to serve as a worker discipline device making job loss costly so as to discourage shirking 1 in response to shapiro and stiglitz s argument carmichael 1985 suggested that workers could pay employment fees to purchase their jobs and that the competition among workers for jobs would raise such fees until all involuntary unemployment disappeared alternatively there is the so called bonding scheme bonds are posted by workers when initially hired and forfeited if the workers are caught shirking the fear of losing the bonds then substitutes for the threat of becoming unemployed in creating work incentives the competition among workers for jobs would allow firms to charge an amount for bonds until there were no difference between employment and unemployment and so again there would be no involuntary unemployment in a nutshell the introduction of an employment fee or a bonding scheme can eliminate involuntary unemployment making obsolete unemployment as a worker discipline device in the real world however rarely are employment fees or bonding observed why do employment fees bonding or the like not then emerge to arbitrage the difference between employment and unemployment so as to eliminate involuntary unemployment this is a puzzle for shirking models romer 1996 461 2 it has been claimed that contracts with upward sloping age earning profiles the so called implicit bonding can act as perfect substitutes for contracts with explicit employment fees or bonds akerlof and katz 1989 negate this claim and show that the implicit bonding in general does not eliminate the need for involuntary unemployment as a worker discipline device to resolve the bonding issue katz 1986 suggests that future theoretical work is required to analyze the problem in an explicitly contractual setting this article offers an attempt in this direction we study a type of contract which is prevalent in the real world and most importantly can act as a perfect substitute for the employment fee or bonding scheme as far as the elimination of involuntary unemployment is concerned the contract in question is the so called tournament 3 a tournament contract compensates workers on the basis of their relative performance prizes arising from tournaments are fixed in advance and a worker receives the winner s prize not by being good in the absolute sense but by being better than the other workers contracts with the characteristics of tournaments are prevalent in labor markets the salesman who sells the most is given a large bonus the best worker gets promoted to become the company manager etc the incentive effects of tournaments have been analyzed in detail by lazear and rosen 1981 green and stokey 1983 nalebuff and stiglitz 1983 malcomson 1984 and others 4 in contrast to the extensive analysis of the microeconomic incentives of tournaments this article focuses on the macroeconomic implications of tournaments in the vein of shirking models it is shown that all involuntary unemployment will disappear if it is feasible for firms to exploit tournaments to full flexibility this finding pinpoints the power of tournament contracts in resolving involuntary unemployment as a consequence of this result the generation of equilibrium unemployment will require that there be certain impediments to the full exploitation of tournaments we suggest institutional constraints legal rules or social norms as possible candidates for the impediments the rest of this article is organized as follows

cyclical factor utilization abstract we introduce procyclical labor and capital utilization as well as costs of rapidly increasing employment into a business cycle model plausible variations in factor utilization enable us to explain observed variability of real gnp with considerably smaller economy wide disturbances the costs of adjustment create very interesting and realistic lead and lag relationships employment does not peak until a full quarter after output workweeks effort capital utilization and productivity all sharply lead the business cycle

family labor supply and aggregate fluctuations abstract this paper considers an economy which is populated by a continuum of identical families consisting of two members the two members have different productivities and the family faces a fixed utility cost if both members supply labor simultaneously although both family members have the same preferences they display very different elasticities of labor supply a real business cycle model is calibrated and it is seen that this cross sectional heterogeneity results in interesting forms of aggregation bias

are micro and macro labor supply elasticities consistent a review of evidence on the intensive and extensive margins we evaluate whether state of the art macro models featuring indivisible labor are consistent with modern quasi experimental micro evidence by synthesizing evidence on both the intensive and extensive margins we find that micro estimates are consistent with macro estimates of the steady state hicksian elasticities relevant for cross country comparisons on both the extensive and intensive margins however micro estimates of intertemporal substitution frisch elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences the key puzzle to be resolved is why micro and macro estimates of the frisch extensive margin elasticity are so different

the intertemporal substitution model of labour market fluctuations an empirical analysis the paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply first log linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations second a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption the influence of expected future real wages and interest rates is captured by the consumption variable the empirical results do not support the intertemporal substitution model

consumption heterogeneity employment dynamics and macroeconomic co movement abstract real business cycle models rely on total factor productivity tfp shocks to explain the observed co movement among consumption investment and hours however an emerging body of evidence identifies investment shocks as important drivers of business cycles this paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and non employed can generate co movement in response non tfp shocks estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business cycle variance in consumption investment and hours a corollary of the model s empirical success is the labor wedge that is not important at business cycle frequencies

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we develop a heterogeneous agent general equilibrium model that incorporates both intensive and extensive margins of labor supply a nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins we consider calibrated versions of this model that dier in the value of a key preference parameter for labor supply and the extent of heterogeneity the model is able to capture the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we then study how the various specications inuence labor supply responses to aggregate technology shocks we nd that abstracting from intensive margin adjustment has large eects on the volatility of aggregate hours even if intensive margin uctuates relatively little

employment and hours over the business cycle abstract approximately one quarter of the adjustment in total hours of employment over the business cycle represents adjustments in hours while the remainder is explained by changes in employment real business cycle models characterize agents as either continuously adjusting their hours or making only labor force participation decisions about jobs with indivisible hours in this paper we extend the representative agent framework to allow for decisions on both participation and hours we calibrate and simulate a dynamic version of the model and show that it is better able to mimic some features of the aggregate data

mood swings and business cycles evidence from sign restrictions this paper provides new evidence that bouts of optimism and pessimism are an important source of u s business cycles using the identification schemes based on sign restrictions we document that identified optimism and pessimism shocks account for about 30 of u s business cycle fluctuations in hours and output in addition our empirical findings are consistent with the intensive and extensive margin adjustments in the u s labor market over business cycles providing further support to optimism shocks being an important source of u s business cycles the identified optimism shocks are at least partially rational as total factor productivity is found to rise 8 12 quarters after an initial bout of optimism while this later finding is consistent with some previous findings in the news shock literature we cannot rule out that such episodes reflect self fulfilling beliefs

the depressing effect of agricultural institutions on the prewar japanese economy why didn t the japanese miracle take place before world war ii the culprit we identify is a barrier that kept prewar agricultural employment constant using a standard neoclassical two sector growth model we show that the barrier induced sectoral distortion and an ensuring lack of capital accumulation account well for the depressed output level without the barrier japan s prewar gnp per worker would have been at least about a half of that of the united states not about a third as in the data the labor barrier existed because we argue the prewar patriarchy forced the son designated as heir to stay in agriculture

ex post heterogeneity and the business cycle abstract a temporary heterogeneity in individual skills is introduced in the indivisible labor model studied by rogerson 1984 and hansen 1985 and the model is calibrated and simulated the results suggest that heterogeneity may be a very important factor affecting the volatilities and comovements of output and other variables the results also show that the average quality variation of employed workers can be as much as 16 percent of the output volatility

consumption and income smoothing this article presents a two sector dynamic general equilibrium model in which income smoothing takes place within the households intra temporally and consumption smoothing takes place among the households inter temporally idiosyncratic risk sharing within the family is based on an income smoothing contract there are two sectors in the model the regular sector and the underground sector and the smoothing comes from the underground sector which is countercyclical with respect to aggregate gdp the article shows that the simulated disaggregated consumption and income series that are the regular and underground consumption flows are more sensitive to exogenous changes in sector specific productivity and tax rates than regular and underground income flows and that this picture is reversed when the aggregate series are considered

welfare costs of sticky wages when effort can respond abstract we examine the impact of wage stickiness when employment has an effort as well as hours dimension despite wages being predetermined the labor market clears through the effort margin consequently welfare costs of wage stickiness are potentially much much smaller

technical progress and aggregate fluctuations abstract we compare the cyclical fluctuations exhibited by a stochastic growth model under various stochastic processes governing technical change all of which are highly autocorrelated the results obtained are quite sensitive to the precise form of this stochastic process in particular the results depend on whether growth is deterministic or stochastic and in each case are quite sensitive to the persistence of an innovation the model does a relatively poor job of accounting for features of observed business cycles when technical change is difference stationary and does a better job when technical change is trend stationary but highly autocorrelated

towards a quantitative theory of automatic stabilizers the role of demographics employment volatility is larger for young and old workers than for the prime aged at the same time in countries with high tax rates the share of total hours supplied by young old workers is lower these two observations imply a negative correlation between government size and business cycle volatility this paper assesses in a heterogeneous agent olg model the quantitative importance of these two facts to account for the empirical relation between government size and macroeconomic stability

unemployment as excess supply of labor implications for wage and price inflation abstract the introduction of both market clearing wages and nominal rigidities on wage setting can be used to rationalize unemployment as excess supply of labor in the new keynesian model as a result wage inflation dynamics are forward looking and depend negatively on the rate of unemployment moreover both price inflation and wage inflation evolve as indicated by equations equivalent to those obtained in erceg et al 2000 though with different slope coefficients in an equal volatility comparison the model with unemployment conveys less price stickiness and more wage stickiness

the new keynesian phillips curve and staggered price and wage determination in a model with firm specific labor we develop a dsge model with rm speci c labor where rm level wage bargaining and price setting are subject to calvo type staggering this is in general an intractable problem due to complicated intertemporal dependencies between price and wage decisions however the problem is signi cantly simpli ed if we in line with empirical evidence assume that prices can be changed whenever wages are we show that the price and wage setting relationships are substantially altered by the introduction of rm speci c labor speci cally the in ation response is substantially dampened whereas the wage in ation response is increased as compared to models with freely mobile labor these distinctive features of the model with rm speci c labor is supported by empirical evidence from a structural var

german wage moderation and european imbalances feeding the global var with theory german labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the euro area we investigate this hypothesis quantitatively we develop a 3 region open economy new keynesian model with search and matching frictions from which we derive robust sign restrictions for wage bargaining and matching efficiency shocks which we term wage moderation shocks we impose these restrictions on a global var consisting of germany and 8 emu countries to identify a wage moderation shock in germany our results show that although the german current account was significantly affected by wage moderation shocks their contribution to european current account imbalances was negligible we conclude that the german labor market reforms cannot be the lone driver of european imbalances

social security and two earner households in the past decades elimination of the pay as you go system in u s has been extensively discussed and studied such an elimination would also eliminate the intra cohort redistribution done by the following policies of social security due to spousal and survivor s beneflt provisions the system redistributes mostly to single earner married households not necessarily progressive retirement beneflts are a concave function of past mean earnings hence the system redistributes from high earners to low earners finally the existence of a cap on social security taxable earnings makes the system regressive this is the flrst paper that quantifles redistributive labor supply and welfare implications of these policies using a general equilibrium life cycle model agents start out as permanently married or single and with education levels and wage proflles where the latter depend both on education and gender the household is the decision maker and decides on the labor supply of its member s and saving the aggregate production function has as inputs capital and labor aggregated by e ciency elimination of these policies results in a 6 1 increase in married female labor force participation rate the middle income single earner married households experience the largest welfare losses whereas the high income two earner households together with high income single households experience the largest welfare gains

fiscal spending shocks endogenous government spending and real business cycles abstract we analyze a real business cycle model in which the government optimally chooses public investment and nonmilitary current expenditures to maximize the welfare of the representative private agent we characterize the optimal response of endogenous spending to shocks to technology and to military expenditures comovements between the components of government spending and other macroeconomic aggregates predicted by the model are compared with the corresponding comovements in the u s data the model captures the qualitative features of the relative volatilities of the components of government spending quite well but predicts too high correlations between the components of government spending and output

the workweek of capital and its cyclical implications abstract the neoclassical growth model studied in the kydland and prescott time to build paper is modified to permit the capital utilization rate to vary the effect of this modification is to increase the amplitude of the aggregate fluctuations predicted by theory as the equilibrium response to technological shocks if following solow the changes in output not accounted for by changes in the labor and tangible capital inputs are interpreted as being the technology shocks the statistical properties of the fluctuations in the postwar united states economy are close in magnitude and nature to those predicted by theory

patience and prosperity abstract this paper introduces wealth dependent time preference into a simple model of endogenous growth the model generates adjustment dynamics in line with the historical facts on savings and economic growth in europe from the high middle ages to today along a virtuous cycle of development more wealth leads to more patience which leads to more savings and further increasing wealth savings rates and income growth rates are thus jointly increasing during the process of development until they converge towards constants along a balanced growth path during the transition to modern growth an economy in which the association of wealth and patience is stronger overtakes an otherwise identical economy and generates temporarily diverging growth rates