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Business cycles and the labour market can theory fit the facts?

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Stephen Millard
Andrew Scott
Marianne Sensier

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Abstract

The performance of six alternative models in accounting for UK labour market behaviour over the business cycle is examined. Models are assessed in terms of their ability to mimic actual cycle correlations and volatility, their success in replicating persistence, and their success in modelling asymmetries between expansions and downturns. Most are found to be successful in accounting for co-movements of key variables and in explaining asymmetries. But the models underpredict the volatility of employment and unemployment, produce too high a correlation between wages and employment, and do not capture the slow adjustment exhibited in the data.

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Paper provided by Bank of England in its series Bank of England working papers with number 93.

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  5. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
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  20. Cho, Jang-Ok & Cooley, Thomas F., 1994. "Employment and hours over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 411-432, March. [Downloadable!] (restricted)
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  25. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October. [Downloadable!] (restricted)
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  1. Rafel Gerke & Jens Rubart, 2003. "Search Unemployment in a Dynamic New Keynesian Model of the Business Cycle," Darmstadt Discussion Papers in Economics 119, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  2. Guillermo Felices & David Tinsley, . "Intertemporal substitution and household production in labour supply," Bank of England working papers 234, Bank of England. [Downloadable!]
  3. Shamik Dhar & Stephen P Millard, . "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England. [Downloadable!]
  4. Bruce Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. John C. Ham & Kevin T. Reilly, 2002. "Testing Intertemporal Substitution, Implicit Contracts, and Hours Restriction Models of the Labor Market Using Micro Data," American Economic Review, American Economic Association, vol. 92(4), pages 905-927, September. [Downloadable!] (restricted)
  6. Buddelmeyer, Hielke & Mourre, Gilles & Ward, Melanie, 2004. "The Determinants of Part-Time Work in EU Countries: Empirical Investigations with Macro-Panel Data," IZA Discussion Papers 1361, Institute for the Study of Labor (IZA). [Downloadable!]
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