handouthansen - Matching Labor Market Data The simple RBC...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Matching Labor Market Data The simple RBC model that we studied in class assumed a very speci f 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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.

Page1 / 4

handouthansen - Matching Labor Market Data The simple RBC...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online