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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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