Industry evidence and the vanishing cyclicality of labor productivity

Molnarova, ZuzanaORCID: (2020) Industry evidence and the vanishing cyclicality of labor productivity. University of Vienna, Department of Economics, Vienna Economic Papers 2001, 56 p. DOI: 2001

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Aggregate labor productivity used to be strongly procyclical in the United States, but the procyclicality has largely disappeared since the mid-1980s. This paper explores the industry-level evidence in order to discriminate between existing explanations of the vanishing procyclicality of the labor productivity. I document the change in the cyclical properties of productivity in the U.S. using industry-level data and focus on a particularly puzzling feature, namely that the correlations of the industry productivity with industry output and labor input remained on average much more stable before and after the mid-1980s compared to the aggregate correlations. In other words, there is little evidence for the vanishing cyclicality of labor productivity at the industry level. I construct a simple industry-level RBC model that nests two leading explanations of the vanishing cyclicality of productivity that have been proposed in the literature. I show that the two explanations have qualitatively different predictions for the cyclical properties of industry-level variables. The mechanism based on a structural change in the composition of aggregate shocks is able to replicate the stability of industry-level moments across time. In contrast, the mechanism based on increased labor market flexibility is less successful in matching the industry-level evidence.

Item Type: Discussion/ Working Paper (["eprint_fieldopt_monograph_type_technicalreport" not defined])
Keywords: business cycles, productivity, industries, factor utilization, Great Moderation
Funders: Österreichische Nationalbank (Jubiläumsfonds)
Classification Codes (e.g. JEL): E32, E24, E37
Research Units: Former Research Units (until 2020) > Macroeconomics and Economic Policy
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Date Deposited: 18 Jan 2021 15:05
Last Modified: 28 Jul 2023 05:10
DOI: 2001

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