Accmulation of Human Capital and Business Cycle

Characteristics of business cycles are quite different across developed countries. As Gordon (1982) pointed out, in the United States real wages and the adjustment of working hours are less flexible than in Britain and Japan. Using a business cycle model with a microeconomic foundation, this paper provides an economic explanation of these differences across the countries. The cost of on-the-job training plays a crucial role. Since the training is a sunk cost, a worker seldom quits his job after participating such training. Hence, the training cost, sometime causes hysteresis. In an economy with high training cost, variances of employment and output are relatively small. In the case of high training cost, exogenous shocks tend to be absorbed by the adjustment of working hours and real wages instead of the emplyoment level. Since a stable employment level and flexible real wages are influences by high traing cost, these characterisitics of time series do not necessarily indicate higher efficiency of the economy. Our model also explains some important characteristics of actual macroeconomic time series, which have not been given enough consideration in existing real business cycle models such as those of Kydland and Prescott (1982) and Hansen (1985). Specifically, in our model the correlation between the employment level and output is low in an economy with high training cost. In addition, in our model labor hoarding phenomena occur and labor productivity is negatively correlated with past output, as is the case in actual economies.