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 or levels stationary specifications of hours. Model comparisons indicate that the data do not favor imposing VAR-type restrictions on the UC models. Copyright © 2008 John Wiley & Sons, Ltd.