2012 Discussion Papers
School of Economics Discussion Paper 12/01
Interpreting the Hours-Technology time-varying relationship
Cristiano Cantore, Filippo Ferroni and Miguel A Léon-Ledesma
University of Surrey, Banque de France and University of Kent
We investigate the time variation in the correlation between hours and technology shocks using a structural business cycle model. We propose an RBC
model with a Constant Elasticity of Substitution (CES) production function
that allows for capital- and labor-augmenting technology shocks. We estimate
the model using US data with Bayesian techniques. In the full sample, we ﬁnd (i) evidence in favor of a less than unitary elasticity of substitution (rejecting
Cobb-Douglas) and (ii) a sizable role for capital augmenting shock for business
cycles ﬂuctuations. In rolling sub-samples, we document that the impact of technology shocks on hours worked varies over time and switches from negative to positive towards the end of the sample. We argue that this change is due to
the increase in the elasticity of factor substitution. That is, labor and capital became less complementary throughout the sample inducing a change in the
sign and size of the the response of hours. We conjecture that this change may have been induced by a change in the skill composition of the labor input.
JEL Classification: E32; E37; C53
Keywords: Real Business Cycles models; Constant Elasticity of Substitution production function; Hours worked dynamics
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