Jordi Galí's paper examines whether technology shocks explain aggregate business cycle fluctuations. Using data from G7 countries, he estimates the conditional correlations between employment and productivity, decomposing the two series into technology and non-technology components. The results show that technology shocks induce a negative comovement between productivity and employment, counterbalanced by a positive comovement from demand shocks. A simple model with monopolistic competition, sticky prices, and variable effort explains these empirical findings. The paper finds that technology shocks generate a negative correlation between employment and productivity, while demand shocks generate a positive correlation. These results contrast with the predictions of standard Real Business Cycle (RBC) models, which predict a positive correlation between productivity and employment. The paper also shows that the pattern of economic fluctuations attributed to technology shocks is largely unrelated to major postwar cyclical episodes. The paper concludes that new-Keynesian models with monopolistic competition, sticky prices, and variable effort are more consistent with the empirical evidence. The paper also discusses the implications of these results for estimates of short-run increasing returns to labor in production function regressions. The results suggest that such returns are significant. The paper also provides international evidence, showing that the findings are consistent across G7 countries. The paper concludes that the evidence is at odds with standard RBC models and consistent with new-Keynesian models.Jordi Galí's paper examines whether technology shocks explain aggregate business cycle fluctuations. Using data from G7 countries, he estimates the conditional correlations between employment and productivity, decomposing the two series into technology and non-technology components. The results show that technology shocks induce a negative comovement between productivity and employment, counterbalanced by a positive comovement from demand shocks. A simple model with monopolistic competition, sticky prices, and variable effort explains these empirical findings. The paper finds that technology shocks generate a negative correlation between employment and productivity, while demand shocks generate a positive correlation. These results contrast with the predictions of standard Real Business Cycle (RBC) models, which predict a positive correlation between productivity and employment. The paper also shows that the pattern of economic fluctuations attributed to technology shocks is largely unrelated to major postwar cyclical episodes. The paper concludes that new-Keynesian models with monopolistic competition, sticky prices, and variable effort are more consistent with the empirical evidence. The paper also discusses the implications of these results for estimates of short-run increasing returns to labor in production function regressions. The results suggest that such returns are significant. The paper also provides international evidence, showing that the findings are consistent across G7 countries. The paper concludes that the evidence is at odds with standard RBC models and consistent with new-Keynesian models.