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The Vanishing Procyclicality of Labor Productivity

  • Thijs van Rens

    (CREI, Universitat Pompeu Fabra and Barcelona GSE)

  • Jordi Gali

    (CREI, Universitat Pompeu Fabra and Barcelona GSE)

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 search frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in search frictions may also have contributed to the observed decline in output volatility.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 705.

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Date of creation: 2010
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Handle: RePEc:red:sed010:705
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