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Imperfect Information, Lagged Labor Adjustment and the Great Moderation

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  • Tim Willems

    (University of Amsterdam)

  • Sweder van Wijnbergen

    (University of Amsterdam)

Abstract

This paper first documents the increase in the time lag with which labor input reacts to output fluctuations ("the labor adjustment lag") that is visible in US data since the mid-1980s. We show that a lagged labor adjustment response is optimal in a setting where there is uncertainty about the persistence of shocks and where labor input is costly to adjust. We then present evidence that both the nature of shocks as well as labor adjustment costs may have changed during the 1980s in a direction that could explain the observed increase in the lag. Finally, we argue that the increased labor adjustment lag has the potential to explain some macroeconomic puzzles that characterize post-1984 US data, such as the reduced procyclicality of labor productivity and the reduction in output volatility (known as the Great Moderation).

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-063/2.

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Date of creation: 17 Jul 2009
Date of revision: 18 Apr 2012
Handle: RePEc:dgr:uvatin:20090063

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Web page: http://www.tinbergen.nl

Related research

Keywords: imperfect information; labor adjustment; jobless growth; option value of waiting; Great Moderation;

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Cited by:
  1. Michael W. L. Elsby & Bart Hobijn & Aysegul Sahin, 2010. "The Labor Market in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 1-69.
  2. Tim Willems, 2010. "Labor Market Matching under Imperfect Information," Tinbergen Institute Discussion Papers 10-098/2, Tinbergen Institute, revised 13 May 2011.
  3. Kevin x.d. Huang & Jie Chen & Zhe Li & Jianfei Sun, . "Financial Conditions and Slow Recoveries," Vanderbilt University Department of Economics Working Papers vuecon-sub-14-00004, Vanderbilt University Department of Economics.

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