Investment-Specific Shocks and Cyclical Fluctuations in a Frictional Labor Market

This paper studies the role of investment-specific shocks as an amplification mechanism of labor market fluctuations. We first show evidence suggesting that after a fall in the relative price of new equipment, not only do investment and output increase but firms also post more vacancies, hours worked increase and unemployment falls. Moreover, we study the quantitative impact of investment-specific shocks on the labor market by incorporating them in a Real Business Cycle model with search and matching frictions. We find that these shocks have a significant amplification effect on labor market fluctuations, increasing the volatility of unemployment, vacancies and total hours more than twofold