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Labor adjustment and productivity in the OECD

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  • Dossche, Maarten
  • Gazzani, Andrea
  • Lewis, Vivien

Abstract

Labor productivity is more procyclical in OECD countries with lower employment volatility. To capture this new stylized fact, we propose a business cycle model with employment adjustment costs, variable hours and labor effort. We show that, in our model with variable effort, greater labor market frictions are associated with procyclical labor productivity as well as stable employment. In contrast, the constant-effort model fails to replicate the observed cross-country pattern in the data. By implication, labor market deregulation has a greater effect on the cyclicality of labor productivity and on the relative volatility of employment when effort can vary. JEL Classification: E30, E50, E60

Suggested Citation

  • Dossche, Maarten & Gazzani, Andrea & Lewis, Vivien, 2021. "Labor adjustment and productivity in the OECD," Working Paper Series 2571, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20212571
    Note: 3577821
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    More about this item

    Keywords

    effort; hours; labor adjustment; labor market deregulation; labor productivity.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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