Investment-Specific Shocks and Cyclical Fluctuations in a Frictional Labor Market∗

This paper studies the role of investment-specific shocks as an amplification mechanism in the labor market fluctuations. We first show evidence that suggests that when technological advances make equipment more expensive, not only investment and output decrease but also firms post fewer vacancies, hours worked are reduced and unemployment increases. Moreover, we study the quantitative impact of this type of shocks on the labor market by incorporating them into a Real Business Cycle model with search and matching frictions. We find that in our model these shocks have direct amplification effect on labor market fluctuations, increasing the volatility of the labor market variables between two and five times. ∗We gratefully acknowledge the insightful comments and suggestions received by Christian Haefke, two anonymous referees and the Editor. José I. Silva is grateful to the Spanish Ministry of Science and Innovation for financial support through grant ECO2009-07636. Manuel Toledo is grateful to the Spanish Ministry of Education and Science for financial support through Grant SEJ2007-65169/ECON. †Universitat de Girona, Email: [email protected] ‡Universidad Carlos III de Madrid. Email: [email protected]