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Flexible prices, labor market frictions and the response of employment to technology shocks

  • Francesco Zanetti
  • Federico S. Mandelman

Recent empirical evidence establishes that a positive technology shock leads to a decline in labor inputs. Can a flexible price model enriched with labor market frictions replicate this stylized fact? We develop and estimate a standard flexible price model using Bayesian methods that allows, but does not require, labor market frictions to generate a negative response of employment to a technology shock. We find that labor market frictions account for the fall in labor inputs.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 683.

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Date of creation: 13 Nov 2013
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Handle: RePEc:oxf:wpaper:683
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