Beiträge zur Jahrestagung des Vereins für Socialpolitik 2015: Ökonomische Entwicklung - Theorie und Politik - Session: Forecasting No. C05-V3
Standard real business cycle models predict a rise in employment following a technology shock. In contrast, numerous empirical studies show that a technology shock leads to a decline in labor input. In this paper, we demonstrate that a flexible price model enriched with interpersonal comparison of consumption expenditures is able to generate a fall in employment in response to a technology shock. The negative labor response is robust to different values assigned to the inverse Frisch elastictiy of labor supply and integrating capital adjustment cost into the model.