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A key feature of the Japanese business cycles over the 1980-2007 period is that the fluctuation of total hours worked leads the fluctuation of output. A canonical real business cycle model cannot account for this fact. This paper uses the business cycle accounting method introduced by Chari, Kehoe and McGrattan (2007) and shows that labor market distortions are important in accounting for the this feature of the Japanese labor supply fluctuation. The author further discusses fundamental economic shocks that manifest themselves as labor wedges and assess their impacts on labor fluctuation.
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