CURRENT REAL-BUSINESS-CYCLE THEORIES AND AGGREGATE LABOR-MARKET FLUCTUATIONS

Hours worked and the return to working are weakly correlated. Traditionally, the ability to account for this fact has been a litmus test for macroeconomic models. Existing real-business-cycle models fail this test dramatically. We modify prototypical real-business-cycle models by allowing government consumption shocks to influence labor-market dynamics. This modification can, in principle, bring the models into closer conformity with the data. Our empirical results indicate that it does.