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Title: Technology Shocks and Employment

Author(s): Fabrice Collard and Harris Dellas

Publication Date: January 2003

Keyword(s): employment, flexible prices, open economy, staggered prices and technological shocks

Programme Area(s): International Macroeconomics

Abstract: Recent empirical work has suggested that in response to a positive technology shock, labour productivity rises more than output, while employment shows a persistent decline. This finding has raised doubts concerning the relevance of the RBC model as well as the quantitative significance of technology shocks as a source of aggregate fluctuations. We show that the inability of the RBC model to fit these stylized facts is an artifact of the closed economy assumption. In an open economy, the flexible price RBC model can match the negative conditional correlation between productivity and employment quite well, as long as trade elasticities fall short of unity and the degree of openness is sufficiently high. The computed variance-decompositions also suggest that there is no empirical inconsistency between matching this correlation and accepting that technology shocks are the main source of variation in output. Moreover, using a low trade elasticity value does not worsen performance along any other dimensions.

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Bibliographic Reference

Collard, F and Dellas, H. 2003. 'Technology Shocks and Employment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3680