DP9853 The Vanishing Procyclicality of Labor Productivity

Author(s): Jordi Galí, Thijs van Rens
Publication Date: March 2014
Keyword(s): effort choice, hiring frictions, labor hoarding, labor market turnover, wage rigidities
JEL(s): E24, E32
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9853

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.