Hours per Capita and Productivity: Evidence from Correlated Unobserved Components Models

Recent studies debate the effect of a permanent productivity shock on hours per capita within a structural VAR context. This paper examines the issue using a correlated unobserved components (UC) framework. The estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours. This result is robust for non-stationary, levels stationary and differenced stationary specifications of hours. A comparison of the UC framework to the structural VAR framework shows that the UC framework with hours in levels performs better.