Productivity shocks in the short and long-run: an intertemporal model and estimation

The nexus between productivity growth and unemployment has been studied in various ways for a long time. In this paper we present a new one, which is to disaggregate data on productivity growth into its short and long-run component. First, we discuss some important contributions in the literature studying the relationship between productivity growth and unemployment both in the short-run and long-run perspective. Second, to study the effects of productivity growth on unemployment more rigorously we formulate a dynamic general equilibrium model in which the agents optimize their decision in two stages. The dynamic general equilibrium model predicts a positive effect of productivity on unemployment in the short-run and a negative unemployment effect in the long. Third, we explore the effect of productivity growth on unemployment empirically. Using Maximum Likelihood Estimation (MI.E) and Structural Vector Autoregression (SVAR), we are able to find the theoretical hypotheses in a diverse set of empirical data.