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Labor adjustment and productivity in the OECD

Maarten Dossche (), Andrea Giovanni Gazzani () and Vivien Lewis ()

No 2571, Working Paper Series from European Central Bank

Abstract: Labor productivity is more procyclical in OECD countries with lower employment volatility. To capture this new stylized fact, we propose a business cycle model with employment adjustment costs, variable hours and labor effort. We show that, in our model with variable effort, greater labor market frictions are associated with procyclical labor productivity as well as stable employment. In contrast, the constant-effort model fails to replicate the observed cross-country pattern in the data. By implication, labor market deregulation has a greater effect on the cyclicality of labor productivity and on the relative volatility of employment when effort can vary. JEL Classification: E30, E50, E60

Keywords: effort; hours; labor adjustment; labor market deregulation; labor productivity. (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-dge and nep-eff
Note: 3577821
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