Labor Hoarding and the Business Cycle

Craig Burnside, Martin Eichenbaum, Sergio Rebelo

NBER Working Paper No. 3556 (Also Reprint No. r1794)
Issued in December 1990
NBER Program(s):Economic Fluctuations and Growth

Existing Real Business Cycle (RBC) models assume that the key impulses to business cycles are stochastic technology shocks. RBC analysts typically measure these technology shocks by the Solow residual. This paper assesses the sensitivity of inference based on Solow residual accounting to labor hoarding behavior. Our main results can be summarized as follows. First, the quantitative implications of RBC models are very sensitive to the possibility of labor hoarding. Allowing for such behavior reduces our estimate of the variance of technology shocks by 50%. Depending on the sample period investigated, this reduces the ability of technology shocks to account for aggregate output fluctuations by 30% to 60%. Second, our labor hoarding model is capable of quantitatively accounting for the observed correlation between government consumption and the Solow residual. Third, unlike standard RBC models, our labor hoarding model is consistent with three important qualitative features of the joint behavior of average productivity and hours worked: (i) average productivity and hours worked do not display any marked contemporaneous correlation, (ii) average productivity is positively correlated with future hours worked, and (iii) average productivity is negatively correlated with lagged hours worked.

download in pdf format
   (471 K)

download in djvu format
   (311 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3556

Published: Journal of Political Economy, Vol. 101, No. 2, pp. 245-273 (April 1993). citation courtesy of

Users who downloaded this paper also downloaded* these:
Burnside, Eichenbaum, and Rebelo Capital Utilization and Returns to Scale
Burnside and Eichenbaum w4675 Factor Hoarding and the Propagation of Business Cycles Shocks
Bernanke and Parkinson w3503 Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries
bertola and Caballero w4472 Cross Sectional Efficiency and Labor Hoarding in an Matching Model of Unemployment
Aiyagari, Christiano, and Eichenbaum w3330 The Output, Employment, and Interest Rate Effects of Government Consumption
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us