DP6409 Labour Market Dynamics and the Business Cycle: Structural Evidence for the United States

Author(s): Morten O Ravn, Saverio Simonelli
Publication Date: August 2007
Keyword(s): Beveridge curve, Dunlop, Dunlop-Tarshis observation, labour market dynamics, neutral and investment specific technology shocks, structural VAR
JEL(s): C32, E24, E32, E52, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6409

We use a 12-dimensional VAR to examine the dynamic effects on the labour market of four structural technology and policy shocks. For each shock, we examine the dynamic effects on the labour market, the importance of the shock for labour market volatility, and the comovement between labour market variables and other key aggregate variables in response to the shock. We document that labour market indicators display "hump-shaped" responses to the identified shocks. Technology shocks and monetary policy shocks are important for labour market volatility but the ranking of their importance is sensitive to the VAR specification. The conditional correlations at business cycle frequencies are similar in response to the four shocks apart from the correlations between hours worked, labour productivity and real wages. To account for the unconditional correlations between these variables, a mixture of shocks are required.