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Labor Supply Factors and Economic Fluctuations

Claudia Foroni, Francesco Furlanetto () and Antoine Lepetit

No 2015/07, Working Paper from Norges Bank

Abstract: We propose a new VAR identfi cation scheme that enables us to disentangle labor supply shocks from wage bargaining shocks. Identifi cation is achieved by imposing robust signrestrictions that are derived from a New Keynesian model with endogenous labor force participation. According to our analysis on US data over the period 1985-2014, labor supply shocks and wage bargaining shocks are important drivers of output and unemployment both in the short run and in the long run. These results suggest that identification strategies used in estimated New Keynesian models to disentangle labor market shocks may be misguided. We also analyze the behavior of the labor force participation rate through the lenses of our model. We find that labor supply shocks are the main drivers of the participation rate and account for about half of its decline in the aftermath of the Great Recession.

Keywords: labor supply shocks; wage mark-up shocks; identification; VAR; labor force participation (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2015-04-13
New Economics Papers: this item is included in nep-lab and nep-mac
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