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Time-varying job creation and macroeconomic shocks

Elisa Guglielminetti () and Meradj Pouraghdam

Labour Economics, 2018, vol. 50, issue C, 156-179

Abstract: In this paper we investigate the time-varying properties of job creation in the United States in connection to the macro-economy. We address this issue through a time-varying parameter VAR (TVP-VAR) with stochastic volatility. We identify four structural shocks by combining zero long-run restrictions and short-run sign restrictions based on a NK-DSGE model with frictional labor markets. Our main findings are as follows. First, at business cycle frequencies for most part of the sample the lion share of the volatility of job creation is explained by non-technology shocks; this challenges the conventional practice of addressing the labor market volatility puzzle (Shimer, 2005) under the assumption that technology shocks are the main driver of fluctuations in hiring. Second, permanent supply shocks had a negative impact on job creation during the Great Inflation period–a result reminiscent of the “hours puzzle” (Galí, 1999). We show that the main candidate in explaining such structural change is the more passive conduct of monetary policy at that time. It follows that the results derived from partial equilibrium models of the labor market, which imply a rise in hiring as technology improves, neglect important transmission channels and may be misleading.

Keywords: Labor market volatility; Search and matching; Structural time varying parameters VAR; Stochastic volatility; Bayesian estimation; Long-run restrictions; Sign restrictions; Technology shocks (search for similar items in EconPapers)
JEL-codes: C11 C32 E24 E32 J01 (search for similar items in EconPapers)
Date: 2018
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