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.
JEL classification: E32
Key words: technology shocks, employment, labor market frictions
The authors thank Charlotte Dendy, Bob Hills, Peter Ireland, Pedro Silos, Lydia Silver, and seminar participants at the Econometric Society Meetings at Duke University and Boston University for extremely helpful comments and suggestions. Paul Whittaker provided superb research assistantship. This manuscript is a largely revised version of a paper originally circulated as "Technology Shocks, Employment and Labor Market Frictions." The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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