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The Vanishing Procyclicality of Labor Productivity

Listed author(s):
  • Galí, Jordi

    ()

    (CREI and Universitat Pompeu Fabra)

  • van Rens, Thijs

    ()

    (University of Warwick)

We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5099.

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Length: 42 pages
Date of creation: Jul 2010
Handle: RePEc:iza:izadps:dp5099
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