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The B.E. Journal of Macroeconomics

Editor-in-Chief: Abraham, Arpad / Cavalcanti, Tiago

Ed. by Carceles-Poveda , Eva / Kambourov, Gueorgui / Lambertini, Luisa / Ruhl, Kim

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What Does It Take to Explain Procyclical Productivity?

Yi Wen1

1Cornell University,

Citation Information: Contributions in Macroeconomics. Volume 4, Issue 1, ISSN (Online) 1534-6005, DOI: 10.2202/1534-6005.1180, June 2004

Publication History

Published Online:
2004-06-23

Labor productivity comoves strongly with output, leads output and employment, and is only weakly correlated with employment. Procyclical productivity is observed in virtually all countries and industries, and it is observed even in periods of fluctuations due to pure demand shocks, such as during the Great Depression and the second World War. This paper shows that a standard RBC model driven by demand shocks alone is able to explain procyclical productivity without the need to resort to technology shocks or increasing returns to scale. The key element is labor hoarding due to adjustment cost of labor. It is also shown that the observed cross-country differences in productivity cycles can be rationalized by a single parameter alone - the size of the adjustment cost of labor.

Keywords: PRODUCTIVITY; DEMAND SHOCKS; REAL-BUSINESS-CYCLE; LABOR HOARDING; CAPACITY UTILIZATION; ADJUSTMENT COST

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