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What Does It Take to Explain Procyclical Productivity

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  • Wen, Yi

    (Cornell U)

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Abstract

Labor productivity comoves strongly with output, leads output and employment, and is only weakly correlated with employment at the businesscycle frequency. Procyclical productivity is observed in virtually all countries and industries, and it is observed at both the business-cycle frequency and the seasonal frequency. Such prominent features of economic °uctuations present a litmus test for business cycle theory. The conventional explanations for procyclical labor productivity are factor hoarding (labor hoarding and capacity utilization) or increasing returns to scale. Existing equilibrium-business cycle theory explain procyclical labor productivity by technology shocks. The sheer magnitude of excess volatilities in productivity relative to employment seems to defy explanations from increasing returns alone. The technology-shock explanation, on the other hand, comes perilously close to assuming the conclusion. Furthermore, even in periods of pure demand shocks, labor productivity remains procyclical. Applying general equilibrium theory, this paper shows that neither technology shocks nor increasing returns to scale are necessary for understanding procyclical productivity. Factor hoarding is su±cient for demand shocks to induce procyclical productivity at both aggregate and disaggregate levels despite constant or even diminishing returns to scale.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 02-14.

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Date of creation: Sep 2002
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Handle: RePEc:ecl:corcae:02-14

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Citations

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Cited by:
  1. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 1-23, January.
  2. 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.
  3. 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.
  4. Wen, Yi, 2002. "Understanding the Inventory Cycle," Working Papers 02-04, Cornell University, Center for Analytic Economics.
  5. Aguiar-Conraria, Luis & Wen, Yi, 2005. "Understanding the Impact of Oil Shocks," Working Papers 05-01, Cornell University, Center for Analytic Economics.
  6. Wen, Yi, 2006. "Demand shocks and economic fluctuations," Economics Letters, Elsevier, vol. 90(3), pages 378-383, March.
  7. 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.
  8. Peng-fei Wang & Yi Wen, 2005. "Another look at sticky prices and output persistence," Working Papers 2005-051, Federal Reserve Bank of St. Louis.
  9. 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.
  10. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics 0512006, EconWPA.
  11. Wen, Yi, 2003. "On the Optimal Volume of Labor Hoarding," Working Papers 03-14, Cornell University, Center for Analytic Economics.
  12. 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.

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