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Labor productivity, effort and the Euro Area business cycle

Year: 2025

Type: article

Abstract: Labor productivity is highly procyclical in the euro area. We investigate the sources of this procyclicality in an estimated New Keynesian business cycle model with labor search frictions and variable factor utilization in both capital and labor. Labor input can vary along three margins: employment, hours, and effort (or utilization). We find evidence for a significant use of the effort margin in labor adjustment. Moreover, a model that uses effort outperforms one with variable capital utilization or dominant technology shocks. Finally, the effort margin dampens inflation volatility.

Source: European Economic Review

DOI: 10.1016/j.euroecorev.2025.105223

Authors: Vivien Lewis, Stefania Villa, Maik H. Wolters

Institutions: Bank of Italy, Friedrich Schiller University Jena

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,690