A well known fact of Japanese business cycles discussed in studies such as Ohkusa and Ariga (1995) is that the labor adjustment is done more in the intensive margin (hours worked per worker) rather than in the extensive margin (employment), which is the opposite to the U.S. Moreover, as shown in Braun, Esteban-Pretel, Okada and Sudo (2006), the fluctuation of hours worked per worker leads the business cycle while the fluctuation of the number of workers lags it. In this paper, I show that a dynamic stochastic general equilibrium model with effort, productivity, and investment specific technology shocks can account for these facts.
