LABOR HOARDING AND THE BUSINESS-CYCLE

This paper investigates the sensitivity of Solow residual based measur es of technology shocks to labor hoarding behavior. Using a structural model of labor hoarding and the identifying restriction that innovati ons to technology shocks are orthogonal to innovations in government c onsumption, we estimate the fraction of the variability of the Solow r esidual that is due to technology shocks. Our results support the view that a significant proportion of movements in the Solow residual are artifacts of labor hoarding behavior. Specifically, we estimate that t he variance of innovations to technology is roughly 50 percent less th an that implied by standard real business cycle models. In addition, o ur results suggest that existing real business cycle studies substanti ally overstate the extent to which technology shocks account for the v ariability of postwar aggregate U.S. output.