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What Does It Take to Explain Procyclical Productivity?

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  • Wen Yi

    ()
    (Cornell University)

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Abstract

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.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 4 (2004)
Issue (Month): 1 (June)
Pages: 1-40

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Handle: RePEc:bpj:bejmac:v:contributions.4:y:2004:i:1:n:5

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Cited by:
  1. Wen, Yi, 2006. "Demand shocks and economic fluctuations," Economics Letters, Elsevier, vol. 90(3), pages 378-383, March.
  2. Kevin x.d. Huang & Jie Chen & Zhe Li & Jianfei Sun, . "Financial Conditions and Slow Recoveries," Vanderbilt University Department of Economics Working Papers vuecon-sub-14-00004, Vanderbilt University Department of Economics.
  3. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics 0512006, EconWPA.
  4. Wang, Peng-fei & Wen, Yi, 2004. "Another Look at Sticky Prices and Output Persistence," Working Papers 04-19, Cornell University, Center for Analytic Economics.
  5. Luís Francisco Aguiar-Conraria & Yi Wen, 2005. "Understanding the Impact of Oil Shocks," NIPE Working Papers 2/2005, NIPE - Universidade do Minho.
  6. Tim Willems & Sweder van Wijnbergen, 2009. "Imperfect Information, Lagged Labor Adjustment and the Great Moderation," Tinbergen Institute Discussion Papers 09-063/2, Tinbergen Institute, revised 18 Apr 2012.
  7. Yi Wen, 2005. "By force of demand: explaining international comovements and the saving-investment correlation puzzle," Working Papers 2005-043, Federal Reserve Bank of St. Louis.
  8. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  9. Luís Aguiar-Conraria & Yi Wen, 2007. "Understanding the Large Negative Impact of Oil Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 925-944, 06.
  10. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 1-23, January.
  11. Wen, Yi, 2003. "On the Optimal Volume of Labor Hoarding," Working Papers 03-14, Cornell University, Center for Analytic Economics.
  12. Yi Pengfei Wang & Wen & Zhiwei Xu, 2012. "What inventories tell us about aggregate fluctuations -- a tractable approach to (S,s) policies," Working Papers 2012-059, Federal Reserve Bank of St. Louis.

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