Output Growth, the Real Wage, and Employment Fluctuations

Abstract

This paper is an attempt to contribute to the integration of business-cycle analysis with long-term growth. A real-business-cycle model with endogenous growth is developed and estimated with U.S. data. In the present framework, wage movements do not have to be transitory to generate fluctuations in labor effort. The reduced form is a constrained bivariate output/hours (or real-wage/hours) vector autoregressive process. The bivariate setup provides a useful framework for analyzing the persistence of output fluctuations, given that the theory implies that hours of work contain information about future output movement. Copyright 1991 by American Economic Association.