Author： van Wijnbergen Sweder Willems Tim
Publisher： Oxford University Press
ISSN： 1464-3812
Source： Oxford Economic Papers, Vol.65, Iss.2, 2013-04, pp. : 219-239
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Abstract
This paper first documents the increase in the lag with which US labour input reacts to macroeconomic fluctuations since the 1980s. We show that lagged labour adjustment is optimal when there is uncertainty about the persistence of shocks and labour input is costly to adjust. We then present evidence that both the nature of shocks hitting the economy as well as labour adjustment costs have changed during the 1980s in a direction that could explain the increase in the lag. Finally, we argue that this development has the potential to explain the reduction in output volatility since the 1980s.
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