Paper #1230

Title:

The vanishing procyclicality of labor productivity

Authors:

Jordi Galí and Thijs van Rens

Date:

August 2008 (Revised: July 2010)

Abstract:

We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility.

Keywords:

labor hoarding, labor market frictions, wage rigidities, effort choice.

JEL codes:

E24; E32.

Area of Research:

Macroeconomics and International Economics

Published in:

The Economic Journal 131(1), 302-326

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