EMPLOYMENT AND HOURS OVER THE BUSINESS-CYCLE

Approximately one quarter of the adjustment in total hours of employment over the business cycle represents adjustments in hours, while the remainder is explained by changes in employment. Real business cycle models characterize agents as either continuously adjusting their hours or making only labor force participation decisions about jobs with indivisible hours. In this paper we extend the representative agent framework to allow for decisions on both participation and hours. We calibrate and simulate a dynamic version of the model and show that it is better able to mimic some features of the aggregate data.