On-the-job learning and news-driven business cycles

Abstract

This paper proposes a new channel of on-the-job learning to explain the positive comovement between consumption and employment following good news about future productivity. The new recruits can generate an additional stream of output production in all future periods, and the firm`s labor demand is thus characterized by the forward-looking property. Therefore, the firm is motivated to hire more new recruits in advance in response to good news about future productivity. Once the increase in labor demand is greater than the decrease in labor supply caused by the income effect, the coincident rise in consumption and employment can be driven by the news shock. When such a channel is paired with investment adjustment costs and the endogenous capacity utilization rate, this paper provides a plausible explanation for simultaneous booms in current consumption, investment, output, and employment to match the empirical evidence under the news shock. © 2015 The Ohio State University.