Matching Labor Market Data
•
The simple RBC model that we studied in class assumed a very speci
fi
c
form of preferences which made labor supply inelastic.
1
In particular, if
we think of preferences in general given by
u
(
C
t
, L
t
) =
(
C
1
−
α
t
L
α
t
)
1
−
ψ
−
1
1
−
ψ
,
we
assumed
α
= 0
and
ψ
= 1
.
In that case, aggregate hours
H
t
= 1
so that
the model had nothing to say about the movement of aggregate hours
H
t
over the business cycle nor about unemployment.
•
In particular, the standard deviation of hours and the contemporaneous
correlation of hours with output are both zero in the simple model. The
data, however, says (Table 1, p.
321 in Hansen (1985)) the standard
deviation of aggregate hours is 1.66 and the correlation with output is
0.76.
•
Since
α
= 0
is obviously at odds with the data, we should consider a
“divisible" labor economy when
α
= 2
/
3
(this parameterization comes
from micro labor studies on labor supply elasticity).
2
In that case, the
model predicts a standard deviation of hours of 0.70 and a correlation of
hours with output of 0.98. Hence a model economy with divisible labor is
less than half as volatile as in the data.
3
•
To bring the model closer to the data, Hansen (1985) and Rogerson (1988)
introduced “indivisible labor". Here, variation in hours comes about by
variation in employment (the extensive margin) rather than variation in
hours per worker (the intensive margin). That is, aggregate hours
H
t
=
h
t
·
N
t
where
h
t
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 Spring '07
 CORBAE
 Unemployment, Keynesian economics, ht

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