Keywords: Procyclical labor productivity, structural change, downsizing
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.
Full paper (555 KB PDF)
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Last update: July 16, 1997