Productivity and unemployment over the business cycle

The low correlation between cyclical unemployment and productivity over the postwar period hides a large sign switch in the mid-1980s from significantly negative the correlation became significantly positive Using a search model of unemployment with nominal rigidities and variable labor effort I show that technology shocks can generate a positive unemployment-productivity correlation whereas non-technology shocks (i e aggregate demand shocks) tend to do the opposite In this context I identify two events that can quantitatively explain the increase in the correlation (i) a sharp drop in the volatility of non-technology shocks in the mid-1980s and (II) a decline in the response of productivity to non-technology shocks which from procyclical became acyclical in the last 25 years Published by Elsevier B V