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Atlanta Fed Working Papers


Technology Shocks, Employment, and Labor Market Frictions

Federico S. Mandelman and Francesco Zanetti
Working Paper 2008-10
February 2008

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Recent empirical evidence suggests that a positive technology shock leads to a decline in labor inputs. However, the standard real business cycle model fails to account for this empirical regularity. Can the presence of labor market frictions address this problem without otherwise altering the functioning of the model? We develop and estimate a real business cycle model using Bayesian techniques that allows but does not require labor market frictions to generate a negative response of employment to a technology shock. The results of the estimation support the hypothesis that labor market frictions are responsible for the negative response of employment.

JEL classification: E32

Key words: technology shocks, employment, labor market frictions


The authors thank M. Laurel Graefe for superb research assistance. They also thank Bob Hills and Pedro Silos for very helpful comments and suggestions. 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.

Please address questions regarding content to Federico S. Mandelman (contact author), Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8785, federico.mandelman@atl.frb.org, or Francesco Zanetti, Bank of England, Threadneedle Street, London, EC2R 8AH, United Kingdom, 44-0-207-601-5602, francesco.zanetti@bankofengland.co.uk.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.

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