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Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?

  • Galí, Jordi

Using data for the G7 countries, conditional correlations of employment and productivity are estimated, based on a decomposition of the two series into technology and non-technology components. The picture that emerges is hard to reconcile with the predictions of the standard real business cycle model. For a majority of countries the following results stand out: (a) technology shocks appear to induce a negative comovement between productivity and employment, counterbalanced by a positive comovement generated by demand shocks; (b) the impulse responses show a persistent decline in employment in response to a positive technology shock; and (c) measured productivity increases temporarily in response to a positive demand shock. More generally, the pattern of economic fluctuations attributed to technology shocks seems to be largely unrelated to major post-war cyclical episodes. A simple model with monopolistic competition, sticky prices and variable effort is shown to be able to account for the empirical findings.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1499.

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Date of creation: Dec 1996
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Handle: RePEc:cpr:ceprdp:1499
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