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Hours and Employment Variation in Business Cycle Theory

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  • Kydland, Finn E
  • Prescott, Edward C

Abstract

Previous business cycle models have made the assumption that all the variation in the labor input is either due to changes in hours per worker or changes in number of workers, but not both. In this paper, both vary. We think this is a better model for estimating the contribution of Solow technology shocks to aggregate fluctuations. We find that about 70 percent of the variance of U.S. postwar cyclical fluctuations is induced by variations in the Solow technology parameter.

Suggested Citation

  • Kydland, Finn E & Prescott, Edward C, 1991. "Hours and Employment Variation in Business Cycle Theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 1(1), pages 63-81, January.
  • Handle: RePEc:spr:joecth:v:1:y:1991:i:1:p:63-81
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    References listed on IDEAS

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    1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    2. Hansen, Gary D. & Sargent, Thomas J., 1988. "Straight time and overtime in equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 281-308.
    3. Lawrence J. Christiano & Martin Eichenbaum, 1988. "Is Theory Really Ahead of Measurement? Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations," NBER Working Papers 2700, National Bureau of Economic Research, Inc.
    4. Kydland, Finn E. & Prescott, Edward C., 1988. "The workweek of capital and its cyclical implications," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 343-360.
    5. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
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    7. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    8. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January.
    9. Danthine, Jean-Pierre & Donaldson, John B., 1990. "Efficiency wages and the business cycle puzzle," European Economic Review, Elsevier, vol. 34(7), pages 1275-1301, November.
    10. Marc Nerlove, 1967. "Recent Empirical Studies of the CES and Related Production Functions," NBER Chapters, in: The Theory and Empirical Analysis of Production, pages 55-136, National Bureau of Economic Research, Inc.
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    13. Hansen, Gary D., 1997. "Technical progress and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1005-1023, June.
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