Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries

Each of the main explanations of procyclical labor productivity, or short-run increasing returns to labor (SRIRL), is closely associated with a competing theory of the business cycle: Real business cycle theorists attribute SRIRL to procyclical technological shocks, proponents of recent theories based on non-convexities believe that SRIRL reflects true increasing returns, and Keynesians favor a labor hoarding explanation. Thus evidence on the sources of SRIRL may be important for discriminating among alternative theories of the cycle. This paper studies the sources of SRIRL in a sample of ten interwar U.S. manufacturing industries. Our main findings are that SRIRL was common in the interwar period and that the pattern of SRIRL across industries was similar to that observed in the postwar period. we argue that, under the presumption that the Depression was not caused by large negative technological shocks, these findings are inconsistent with the technological shocks hypothesis and provide evidence against real business cycle theory in general. we propose tests for discriminating between the increasing returns and labor hoarding explanations but find that our conclusions differ by industry.