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Imperfect information, lagged labour adjustment, and the Great Moderation

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  • Sweder van Wijnbergen
  • Tim Willems

Abstract

This paper first documents the increase in the lag with which US labour input reacts to macroeconomic fluctuations since the 1980s. We show that lagged labour adjustment is optimal when there is uncertainty about the persistence of shocks and labour input is costly to adjust. We then present evidence that both the nature of shocks hitting the economy as well as labour adjustment costs have changed during the 1980s in a direction that could explain the increase in the lag. Finally, we argue that this development has the potential to explain the reduction in output volatility since the 1980s. Copyright 2013 Oxford University Press 2012 All rights reserved, Oxford University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:oxecpp:v:65:y:2013:i:2:p:219-239
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    Cited by:

    1. Kevin x.d. Huang & Jie Chen & Zhe Li & Jianfei Sun, 2014. "Financial Conditions and Slow Recoveries," Vanderbilt University Department of Economics Working Papers 14-00004, Vanderbilt University Department of Economics.
    2. 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.
    3. Tim Willems, 2010. "Labor Market Matching under Imperfect Information," Tinbergen Institute Discussion Papers 10-098/2, Tinbergen Institute, revised 13 May 2011.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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

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