DP1499 Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?

Author(s): Jordi Galí
Publication Date: December 1996
Keyword(s): Business Cycles, New Keynesian Models, Real Business Cycle Models, Sticky Prices, Structural VAR
JEL(s): E24, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1499

Using data for the G7 countries, conditional correlations of employment and productivity are estimated, based on a decomposition of the two series into technology and non-technology components. The picture that emerges is hard to reconcile with the predictions of the standard real business cycle model. For a majority of countries the following results stand out: (a) technology shocks appear to induce a negative comovement between productivity and employment, counterbalanced by a positive comovement generated by demand shocks; (b) the impulse responses show a persistent decline in employment in response to a positive technology shock; and (c) measured productivity increases temporarily in response to a positive demand shock. More generally, the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major post-war cyclical episodes. A simple model with monopolistic competition, sticky prices and variable effort is shown to be able to account for the empirical findings.