Labor Market and Cyclical Fluctuations

The purpose of this paper is to investigate how labor and good market comovements account for aggregate fluctuations in the US economy after the first oil shock. Labor supply and labor demand are approximated by labor force and employment respectively since we do not assume market clearing at cyclical frequencies. Real wages link labor and good markets by affecting labor quantities and aggregate supply of goods. Aggregate demand for goods is expressed in terms of income determination, which is largely dominated by labor income. Finally, a money reaction function is introduced to assess the role of nominal shocks.