Labour productivity and the wageless recovery

We document that the feeble relation between wage growth and unemployment experienced by the euro area since the Global Financial Crisis has been coupled with a change in the response of labour productivity (output per worker) to an increase in employment, from nil up to 2009 (acyclical) to negative since then (countercyclical). We argue that both facts can be explained by the strong persistence of the last recession and of the subsequent recovery. The relevance of the duration of the cyclical phase can be rationalized in a theoretical model where firms use both the extensive and intensive margin of labour and face employment adjustment costs. When demand shocks are persistent firms adjust relatively more the extensive margin, leading to a countercyclical response of labour productivity and only to a small reaction of wages. We take the model to the data using a Bayesian VAR, where persistent demand shocks are identified exploiting the theoretical prediction which associates them with a countercyclical profile of labour productivity. We show that persistent demand shocks (i) induce a lower reaction of wages to employment and (ii) have been a non negligible driver of employment and wage dynamics in the aftermath of the Global Financial Crisis.