The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Labor Productivity: Structural Change and Cyclical Dynamics
Martin N. Baily, Eric J. Bartelsman, and John Haltiwanger

Abstract: A longstanding puzzle of empirical economics is that average labor productivity declines during recessions and increases during booms. This paper provides a framework to assess the empirical importance of competing hypotheses for explaining the observed procyclicality. For each competing hypothesis we derive the implications for cyclical productivity conditional on expectations of future demand and supply conditions. The novelty of the paper is that we exploit the tremendous heterogeneity in long-run structural changes across individual plants to identify the short-run sources of procyclical productivity. Our findings favor an adjustment cost model which involves a productivity penalty for downsizing as the largest source of procyclical labor productivity.

Keywords: Procyclical labor productivity, structural change, downsizing

Full paper (555 KB PDF)

Home | Economic research and data | FR working papers | FEDS | 1996 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: July 16, 1997