The Labor Market Effects of Technology Shocks, CEPR working paper 6365

We analyze the labor market effects of neutral and investment-specific tech-nology shocks along the intensive margin (hours worked) and the extensive mar-gin (unemployment). We characterize the dynamic response of unemployment in terms of the job separation and the job finding rate. Labor market adjust-ments occur along the extensive margin in response to neutral shocks, along the intensive margin in response to investment specific shocks. The job separation rate accounts for a major portion of the impact response of unemployment. Neu-tral shocks prompt a contemporaneous increase in unemployment because of a sharp rise in the separation rate. This is prolonged by a persistent fall in the job finding rate. Investment specific shocks rise employment and hours worked. Neutral shocks explain a substantial portion of the volatility of unemployment and output; investment specific shocks mainly explain hours worked volatility. This suggests that neutral progress is consistent with Schumpeterian creative de-struction, while investment-specific progress operates as in a neoclassical growth model. JEL classification: E00, J60, O33. Key words: Search frictions, technological progress, creative destruction. ∗We owe much gratitude to Robert Shimer for kindly making his data available to us. The opinions and analyses are the responsability of the authors and, therefore, do not necessarily coincide with thos