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What Does It Take to Explain Procyclical Productivity?

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  • Wen Yi

    (Cornell University)

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.

Suggested Citation

  • Wen Yi, 2004. "What Does It Take to Explain Procyclical Productivity?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-40, June.
  • Handle: RePEc:bpj:bejmac:v:contributions.4:y:2004:i:1:n:5
    DOI: 10.2202/1534-6005.1180
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    3. Wen, Yi, 2003. "On the Optimal Volume of Labor Hoarding," Working Papers 03-14, Cornell University, Center for Analytic Economics.
    4. Kevin x.d. Huang & Jie Chen & Zhe Li & Jianfei Sun, 2014. "Financial Conditions and Slow Recoveries," Vanderbilt University Department of Economics Working Papers 14-00004, Vanderbilt University Department of Economics.
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    6. Aguiar-Conraria, Luis & Wen, Yi, 2005. "Understanding the Impact of Oil Shocks," Working Papers 05-01, Cornell University, Center for Analytic Economics.
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    12. Sweder van Wijnbergen & Tim Willems, 2013. "Imperfect information, lagged labour adjustment, and the Great Moderation," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 219-239, April.
    13. Anneleen Vandeplas & Anna Thum-Thysen, 2019. "Skills Mismatch and Productivity in the EU," European Economy - Discussion Papers 100, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    14. Michel Dumont, 2011. "Working Paper 11-11 - A decomposition of industry-level productivity growth in Belgium using firm-level data," Working Papers 1111, Federal Planning Bureau, Belgium.
    15. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics 0512006, University Library of Munich, Germany.
    16. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
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    19. Jiang, Mingming, 2016. "By force of demand: Explaining cyclical fluctuations of international trade and government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 249-267.
    20. Wang, Pengfei & Wen, Yi & Xu, Zhiwei, 2014. "What inventories tell us about aggregate fluctuations—A tractable approach to (S,s) policies," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 196-217.
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    23. Patrick Fracois & Huw Lloyd-Ellis, 2005. "Schumpeterian Restructuring," Working Paper 1039, Economics Department, Queen's University.
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    25. Manzoor Ahmad & Jianghuai Zheng, 2023. "The Cyclical and Nonlinear Impact of R&D and Innovation Activities on Economic Growth in OECD Economies: a New Perspective," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(1), pages 544-593, March.

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