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The Vanishing Procyclicality of Labor Productivity

Author

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  • Galí, Jordi

    (CREI, Universitat Pompeu Fabra)

  • van Rens, Thijs

    (University of Warwick)

Abstract

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.

Suggested Citation

  • Galí, Jordi & van Rens, Thijs, 2010. "The Vanishing Procyclicality of Labor Productivity," IZA Discussion Papers 5099, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5099
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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