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The Vanishing Procyclicality of Labor Productivity

Jordi Galí () and Thijs van Rens ()

No 489, Working Papers from Barcelona Graduate School of Economics

Abstract: We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity vanished, (ii) the relative volatility of employment rose, and (iii) the relative (and absolute) volatility of the real wage rose. We propose an explanation for all three changes that is based on a common source: the decline in labor market turnover, which reduced hiring frictions. We develop a simple model with hiring frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the decline in turnover may also have contributed to the observed decline in output volatility.

Keywords: labor hoarding; labor market turnover; hiring frictions; Wage rigidities; effort choice (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Date: 2014-01
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