Journal Article

Imperfect information, lagged labour adjustment, and the Great Moderation

Sweder van Wijnbergen and Tim Willems

in Oxford Economic Papers

Volume 65, issue 2, pages 219-239
Published in print April 2013 | ISSN: 0030-7653
Published online September 2012 | e-ISSN: 1464-3812 | DOI: https://dx.doi.org/10.1093/oep/gps037
Imperfect information, lagged labour adjustment, and the Great Moderation

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  • Demand and Supply of Labour
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Prices, Business Fluctuations, and Cycles

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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.

Keywords: E24; E32; J23; J24

Journal Article.  7357 words.  Illustrated.

Subjects: Demand and Supply of Labour ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Prices, Business Fluctuations, and Cycles

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