The effects of macroeconomic policy shocks on the UK labour market

Abstract

This paper discusses the dynamic response of employment, average hours, and real wages to macroeconomic policy shocks in the UK in the period 1970 Q1–2003 Q1. Following a monetary policy shock the adjustment of labour input is primarily along the extensive margin. However, there is also significant adjustment along the intensive margin 1 year after the shock. A government spending shock leads to a fall in employment and hours, whereas real wages rise. This is attributed to the wage bill component of government consumption.