The Dynamic Effects of Shocks to Labour Markets: Evidence from OECD Countries

Abstract

This paper uses a set of plausible long-run identifying restrictions on a three-variable system, including output growth, real wage growth, and the unemployment rate, to isolate three independent structural shocks which drive fluctuations in those variables in a sample of 16 OECD countries during 1950-96. These shocks are interpreted as aggregate demand, productivity, and labour supply disturbances. As a by-product of the previous analysis, the cyclical behaviour of real wages in response to a demand shock is re-examined and two indices of real wage rigidity are derived.