Technology shocks and the dynamic response of labor employment

In this paper, we empirically investigate the dynamic effects of neutral & investment-specific technology shocks on labor employment in China. Under the assumption that investment-specific technology shock is the unique source of secular trend in relative price of investment goods, we find that labor employment increases (decreases) in response to a positive investment-specific (neutral) shock in an identified SVAR with long-run restriction. We argue that empirical results obtained in one-neutral-shock model do misrepresent the important short-run dynamics of employment to different technology shocks in the actual economy.