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Labor Supply Factors and Economic Fluctuations

Author

Listed:
  • Claudia Foroni

    (Norges Bank (Central Bank of Norway))

  • Francesco Furlanetto

    (Norges Bank (Central Bank of Norway))

  • Antoine Lepetit

    (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne)

Abstract

We propose a new VAR identfi cation scheme that enables us to disentangle labor supply shocks from wage bargaining shocks. Identifi cation is achieved by imposing robust signrestrictions that are derived from a New Keynesian model with endogenous labor force participation. According to our analysis on US data over the period 1985-2014, labor supply shocks and wage bargaining shocks are important drivers of output and unemployment both in the short run and in the long run. These results suggest that identification strategies used in estimated New Keynesian models to disentangle labor market shocks may be misguided. We also analyze the behavior of the labor force participation rate through the lenses of our model. We find that labor supply shocks are the main drivers of the participation rate and account for about half of its decline in the aftermath of the Great Recession.

Suggested Citation

  • Claudia Foroni & Francesco Furlanetto & Antoine Lepetit, 2015. "Labor Supply Factors and Economic Fluctuations," Working Paper 2015/07, Norges Bank.
    • Handle: RePEc:bno:worpap:2015_07
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2015/72015/
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    Keywords

    labor supply shocks; wage mark-up shocks; identification; VAR; labor force participation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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