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Hours and Employment Variation in Business-Cycle Theory

In: Business Cycles

Author

Listed:
  • Finn E. Kydland

    (Carnegie-Mellon University)

  • Edward C. Prescott

    (Federal Reserve Bank Of Minneapolis And University Of Minnesota)

Abstract

In previous studies (Kydland and Prescott, 1982 and 1988a) we estimate the importance of variations in the Solow technology parameter as a source of aggregate fluctuations. We find that they were a major source accounting for over half of the fluctuations in the output of the American economy in the period immediately after the Korean War. These conclusions are based upon the study of model economies with the property that all workers work the same number of hours in equilibrium and that there is no variation in the number employed. Hansen (1985) studied a growth economy with the Roger- son (1988) labour indivisibilities. In his environment individuals are constrained each period either to work some fixed number of hours or not to work at all. By construction, it is the number employed rather than the hours worked per employed person that varies. In such worlds the aggregate willingness of people to substitute leisure intertemporally is considerably higher than that of the individuals whose behaviour is being aggregated. For the Hansen economy, fluctuations exceeded those experienced by the US economy in the period immediately after the Korean War.

Suggested Citation

  • Finn E. Kydland & Edward C. Prescott, 1991. "Hours and Employment Variation in Business-Cycle Theory," International Economic Association Series, in: Niels Thygesen & Kumaraswamy Velupillai & Stefano Zambelli (ed.), Business Cycles, chapter 5, pages 107-134, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-11570-9_5
    DOI: 10.1007/978-1-349-11570-9_5
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    References listed on IDEAS

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    1. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 176-215, June.
    2. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    9. 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.
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