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Labor productivity, effort and the euro area business cycle

Vivien Lewis (), Stefania Villa () and Maik Wolters

No 44/2019, Discussion Papers from Deutsche Bundesbank

Abstract: The Euro Area is characterized by little variation in unemployment and strongly procyclical labor productivity. We capture both characteristics in a New Keynesian business cycle model with labor search frictions, where labor can vary along three margins: employment, hours, and effort. We estimate the model with Bayesian methods and find evidence for a significant use of the effort margin in generating procyclical productivity. We show that a model with labor effort is more successful at matching the business cycle facts than is one with variable capital utilization or dominant technology shocks. Finally, we demonstrate that effort dampens the response of inflation to exogenous shocks.

Keywords: effort; labor utilization; labor productivity; inflation (search for similar items in EconPapers)
JEL-codes: E30 E50 E60 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-ore
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