Indivisible labor and the business cycle

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Abstract

A growth model with shocks to technology is studied. Labor is indivisible, so all variability in hours worked is due to fluctuations in the number employed. We find that, unlike previous equilibrium models of the business cycle, this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity. This finding is independent of individuals' willingness to substitute leisure across time. This and other findings are the result of studying and comparing summary statistics describing this economy, an economy with divisible labor, and post-war U.S. time series.

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This paper is part of my doctoral dissertation written while a student at the University of Minnesota. I have benefited from conversations with many people including Robert King, Thomas Sargent, Christopher Sims, Neil Wallace, Sumru Altug, Patrick Kehoe, Ramon Marimon, Ian Bain, and Rody Manuelli. I owe my greatest debt, however, to my advisor, Edward Prescott. I wish to also acknowledge the Federal Reserve Bank of Minneapolis which has provided support for this research. All errors, of course, are mine.

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