In the data we observe that output is positively correlated with product market tightness, which suggests that labour demand shocks mostly reflect aggregate demand shocks and not technology shocks. To explain the argument, we turn again to the world of restaurants. If the aggregate demand for meals increases, more meals will be sold, and the share of tables that are occupied will increase. Formally, output and product market tightness move in the same direction with demand shocks. In contrast, if restaurants suddenly have access to better technology – for instance microwave ovens that allow them to prepare in meals in only 15 minutes instead of the usual 30 minutes – more meals will also be sold, but the share of tables that are occupied will decrease significantly because customers will wait a shorter time in restaurant queues. Formally, output and product market tightness move in opposite direction with technology shocks. Figure 3 shows that product market tightness and output are positively correlated over the business cycle. The implication is that labour market fluctuations are mostly driven by aggregate demand shocks and not by technology shocks. In particular, product market tightness fell sharply during the Great Recession in 2009, consistent with a collapse in aggregate demand.Here's looking at you, Scott Sumner.
Wednesday, August 13, 2014
Not surprising that two French economists--Pascal Michaillat and Emmanuel Saez--would look to the restaurant industry for insight on the macroeconomy;