DP7962 Technology-Hours Redux: Tax Changes and the Measurement of Technology Shocks

Author(s): Karel Mertens, Morten O Ravn
Publication Date: August 2010
Keyword(s): business cycles, hours worked, tax shocks, technology shocks
JEL(s): E2, E31, H3
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7962

A number of empirical studies find that permanent technological improvements give rise to a temporary drop in hours worked. This finding seriously questions the technology-driven business cycle hypothesis. In this paper we argue that it is important to control for permanent changes in taxes, which invalidate the standard long run identifying assumptions for technology shocks and induce low frequency fluctuations in hours worked. Using the narrative data of Romer and Romer (2010), we find that tax shocks have significant long run effects on aggregate hours, output and labor productivity. We also find that, after controlling for tax shocks, permanent shocks to labor productivity generate short run increases in hours worked and are an important source of fluctuations in US output.