Abstract
This paper studies the behaviour of hours-worked in the event of positive technology shock first in the closed economy DSGE model and second by adding a corporate profits in a bivariate SVAR model. Our analytical results show that in the presence of sticky prices, hours decrease in the event of a shock. However, in case of flexible prices or when central bank systematically respond to technology shocks, hours increase. Results based on SVAR model show that the inclusion of profits change the result of Gali (1999) by showing that hours increase at the aggregate level. However, sectoral analysis reveals different picture. Out of four only one sector is consistent with aggregate findings.
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Notes
The main findings of Kydland and Prescott (1982) papers are (i) investment is almost three times more volatile than output, (ii) nondurables consumption is less volatile than output, (iii) hours worked and output move in tandem, (iv) almost all macroeconomic variables are strongly procyclical (positively correlated with output), and (v) macroeconomic variables show persistency (Rebelo 2005, page 4).
The average duration of prices is 1/(1−η).
We define production function in level form as: \( {Y}_t={A}_t{N}_t^{1-\alpha } \) where Nt is number of hours worked and At measures technology.
Given k = (1 − α + αε)−1(v + α + σ(1 − α)) and by following Gali (2008) if set v = σ then we can show easily that k < 1 if and only if v > (2 − α)−1(1 + α(ε − 2)). Again following Gali, if we set α = 0.67, ε = 6 then we can show that k will be less than 1 if and only if v > 1.4 or wag elasticity (1/v) is great than 0.71.
Gali (1999) proposes to interpret permanent shocks to productivity as the technology shocks, which is consistent with many macroeconomic models.
Corporate Profits with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj).
The Phillips-Perron unit root test also fails to reject unit root in the levels of all-time series, but rejects null for the first difference.
The Phillips-Perron unit root test for the sectoral data i.e. manufacturing, nonfinancial, retail trade and wholesales also fails to reject unit root in the levels of all-time series, but rejects the same null for the first difference.
Bureau of Labor Statistics
Source: BLS, the economic daily 2002
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Malik, K.Z., Ali, S.Z. Is the empirical relationship between hours and productivity effected by corporate profits?. J Econ Finan 44, 99–119 (2020). https://doi.org/10.1007/s12197-019-09477-5
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DOI: https://doi.org/10.1007/s12197-019-09477-5