Global Crisis: Business Cycle Theory

Business cycle research started in mid 1970s by 2004 Nobel winners Finn E. Kydland and Edward C. Prescott provides an insight on what happens to wages and labor supply during business cycles. In their analysis a positive technology shocks leads to higher productivity which in turn causes wages to increase. Higher wages also increase labor supply. Output also raises because of higher productivity and labor input. This trend keeps as long as technology growth is above the average. The opposite occurs if technology growth is lower than the average which leads workers to work fewer hours and consumers to invest less. Thus as long as the technology growth is higher or lower than average the economy goes through booms and bust.
Business cycle theory can help us to understand the effects on wages and employment that an economic episode as the current economic crises has.