Chapter 8Indivisible Labor and The Business Cycle

Journal of Monetary Economics 16(3), November 1985, pp. 309-328.

Gary D. HANSEN*

A growth model with shocks to technology is studied. Labor is indivisible, so all variability in hours worked is due to fluctuations in the number employed. We find that, unlike previous equilibrium models of the business cycle, this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity. This finding is independent of individuals’ willingness to substitute leisure across time. This and other findings are the result of studying and comparing summary statistics describing this economy, an economy with divisible labor, and post-war U.S. time series.

1 Introduction

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