Hours Worked and Permanent Technology Shocks in Open Economies

We use Structural Vector Autoregressions to study the impact of technology improvements on hours worked in the major seven countries. While previous studies estimate the response of labor input to permanent shocks to country-level labor productivity, we consider the response of labor input to aggregate-level labor productivity. Since labor productivities do cointegrate in the G7, the estimated responses should look very similar. They do not: for each country but Germany, the responses estimated using G7 labor productivity sizeably exceed those estimated using country-level labor productivity. These results also hold in larger SVAR models.