Labor Adjustment and Productivity in the OECD

Labor productivity is more procyclical in OECD countries with lower employment volatility. To capture this new stylized fact, we propose a business cycle model adjustment costs, variable hours and labor effort. We show that, our effort, greater market frictions are associated as well stable employment. In contrast, the constant-effort fails to replicate observed cross-country pattern data. By implication, deregulation has effect on cyclicality of relative volatility when effort can vary.