Why hours worked decline less after technology shocks?

Abstract

The contractionary effect of technology shocks on hours gradually vanishes over time in OECD countries. To rationalize the decline in hours and its disappearance, we use a VAR-based decomposition of technology shocks into symmetric and asymmetric technology improvements. While hours decline dramatically when technology improves at the same rate across sectors, hours significantly increase when technology improvements occur at different rates. Because they are primarily driven by symmetric technology improvements, permanent technology shocks drive down total hours. Such a decline progressively vanishes due to the growing importance of asymmetric technology shocks. To reach these two conclusions, we simulate a two-sector model which can reproduce the contractionary effect on hours once the economy is internationally open and we allow for production factors’ mobility costs, factor-biased technological change, and home bias. To account for the vanishing decline in hours, we have to let the share of asymmetric technology shocks increase over time.