Investment-Specific Shocks and Cyclical Fluctuations in a Frictional Labor Market

Abstract

This paper studies the role of investment-specific shocks as an amplification mechanism in the labor market fluctuations. We first show evidence that suggests that when technological advances make equipment more expensive, not only investment and output decrease but also firms post fewer vacancies, hours worked are reduced and unemployment increases. Moreover, we study the quantitative impact of this type of shocks on the labor market by incorporating them into a Real Business Cycle model with search and matching frictions. We find that in our model these shocks have direct amplification effect on labor market fluctuations, increasing the volatility of the labor market variables between two and five times.

Oil Price Shocks and Labor Market Fluctuations

“…Toledo and Silva (2010), for example, show that investment-specific technological shocks (i -shocks) reduce the correlation coefficients between GDP and the rest of labor market and macroeconomic variables (for example, the correlation between GDP and unemployment falls from -0.95 to -0.82; see their Table7for details)…”