Labor market and cyclical fluctuations (Q4381641)

The purpose of this paper is to investigate how labor and good market comovements account for aggregate fluctuations in the US economy after the first oil shock. Labor supply and labor demand are approximated by labor force and employment respectively since we do not assume market clearing at cyclical frequencies. Real wages link labor and good markets by affecting labor quantities and aggregate supply of goods. Aggregate demand for goods is expressed in terms of income determination, which is largely dominated by labor income. Finally, a money reaction function is introduced to assess the role of nominal shocks. Handling both sides of labor and goods markets aims at disentangling technology and labor supply shocks, two sources that are inevitably mixed when extracted from unemployment and GNP variables only. This problem was perceived though not settled by Shapiro-Watson (1988) who proxied labor supply by worked hours, i.e. by a variable that at business cycle frequencies should reflect labor demand instead. Here business cycles are made observable and then estimated by using Aoki's two-step state space algorithm: residuals of the first step are stationary cyclical variables to be modeled in the second stage. Identification is achieved by contemporaneous restrictions that extend to the economy the intertemporal decision rules found for an optimizing representative agent. The model dynamics has no restriction in order to fully use time series evidence. Thus, no long-run constraint is introduced, our emphasis being on testing rather than assuming the dynamics of the structural shocks. For the entire collection see [Zbl 0855.00030].