Technology shocks and employment

Abstract

Recent empirical work has suggested that in response to a positive technology shock employment shows a persistent decline. We show that the standard, open economy, flexible price model can generate a negative response of employment to a positive technology shock and can also match the negative conditional correlation between productivity and employment quite well if trade elasticities are low. While the model also has good overall properties, it fails to generate sufficient procyclicality in employment. This finding indicates that the RBC model faces a tension between accounting for the negative response of employment to technology shocks and simultaneously maintaining that technology shocks are the major source of business cycle fluctuations.