Imperfect Information, Lagged Labor Adjustment and the Great Moderation
AbstractThis 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 InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-063/2.
Date of creation: 17 Jul 2009
Date of revision: 18 Apr 2012
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imperfect information; labor adjustment; jobless growth; option value of waiting; Great Moderation;
Other versions of this item:
- Sweder van Wijnbergen & Tim Willems, 2013. "Imperfect information, lagged labour adjustment, and the Great Moderation," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 219-239, April.
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-16 (All new papers)
- NEP-BEC-2009-08-16 (Business Economics)
- NEP-CBA-2009-08-16 (Central Banking)
- NEP-LAB-2009-08-16 (Labour Economics)
- NEP-MAC-2009-08-16 (Macroeconomics)
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- Michael W. Elsby & Bart Hobijn & Aysegul Sahin, 2010.
"The Labor Market in the Great Recession,"
NBER Working Papers
15979, National Bureau of Economic Research, Inc.
- Michael Elsby & Bart Hobjin & Aysegül Sahin, 2010. "The labor market in the Great Recession," Working Paper Series 2010-07, Federal Reserve Bank of San Francisco.
- Bart Hobijn & Aysegul Sahin & Michael Elsby, 2010. "The Labor Market in the Great Recession," 2010 Meeting Papers 323, Society for Economic Dynamics.
- Tim Willems, 2010. "Labor Market Matching under Imperfect Information," Tinbergen Institute Discussion Papers 10-098/2, Tinbergen Institute, revised 13 May 2011.
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