Industry evidence and the vanishing cyclicality of labor productivity

Author(s): Zuzana Molnarova
Abstract: 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.
Organisation(s): Department of Economics
No. of pages: 56
Publication date: 01-2020
Austrian Fields of Science 2012: 502018 Macroeconomics
Portal url: https://ucris.univie.ac.at/portal/en/publications/industry-evidence-and-the-vanishing-cyclicality-of-labor-productivity(ddbc516f-f6c0-4384-aae2-21ed434f37dd).html