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Labor-Supply Shifts and Economic Fluctuations

Author

Listed:
  • Yongsung Chang

    (University of Pennsylvania)

  • Frank Schorfheide

    (University of Pennsylvania)

Abstract

We investigate the role of labor-supply shifts in economic fluctuations. A new VAR identification scheme for labor supply shocks is proposed. According to our VAR analysis of post-war U.S. data, labor-supply shifts account for about half the variation in hours and one-fifth of variation in aggregate output. To assess the role of labor-supply shifts in a more structural framework, estimates from a dynamic stochastic general equilibrium (DSGE) model with stochastic variation in home production technology are compared to those from the VAR. To obtain a VAR identification scheme that is consistent with the DSGE model, we cannot solely rely on ``zero-restrictions''. Instead we indirectly specify a proper prior distribution for impulse responses and variance decompositions and update it through the sample information. Our method provides an alternative to recently proposed identification schemes that rely on inequality restrictions on the direction of impulse responses.

Suggested Citation

  • Yongsung Chang & Frank Schorfheide, 2002. "Labor-Supply Shifts and Economic Fluctuations," Macroeconomics 0204005, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0204005
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    References listed on IDEAS

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    More about this item

    Keywords

    Fluctuation of Hours; VAR Identification; Home Production; Bayesian Econometrics;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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