Working Paper

Flexible prices, labor market frictions, and the response of employment to technology shocks

Abstract: Recent empirical evidence establishes that a positive technology shock leads to a decline in labor inputs. Can a flexible price model enriched with labor market frictions replicate this stylized fact? We develop and estimate a standard flexible price model using Bayesian methods that allows, but does not require, labor market frictions to generate a negative response of employment to a technology shock. We find that labor market frictions account for the fall in labor inputs.

Keywords: technology shocks; employment; labor market frictions;

JEL Classification: E32;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2013-12-01

Number: 2013-16

Pages: 25 pages