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Working Papers

July 2003, No. 03-7

Labor Supply Shifts and Economic Fluctuations

Yongsung Chang and Frank Schorfheide

We propose a new VAR identification scheme that distinguishes shifts of and movements along the labor demand schedule to identify labor-supply shocks. According to our VAR analysis of post-war U.S. data, labor-supply shifts account for about 30 percent of the variation in hours and about 15 percent of the output fluctuations at business cycle frequencies. To assess the role of labor-supply shifts in a more structural framework, estimates from a dynamic general equilibrium model with stochastic variation in home production technology are compared to those from the VAR.

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