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Productivity or Employment: Is It a Choice?

  • Andrea De Michelis


  • Marcello Estevão


  • Beth Anne Wilson


Traditionally, shocks to total factor productivity (TFP) are considered exogenous and the response of employment is determined by their effect on aggregate demand. We approach the relationship between TFP and labour input differently, raising the possibility that in response to labour supply shocks firms adjust production efficiency. TFP would, thus, be endogenous to firms’ production decisions. We present cross-country evidence of a strong negative correlation between growth in TFP and labour inputs over the medium to long run. This result is robust to changing datasets, sample periods, and industry composition. To address the question of causality, we use instruments to capture changes in hours worked that are independent of TFP movements and find that TFP growth falls (increases) following a pickup (decline) in hours growth. These results have important policy implications.

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Article provided by Centre for the Study of Living Standards in its journal International Productivity Monitor.

Volume (Year): 25 (2013)
Issue (Month): (Spring)
Pages: 41-60

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Handle: RePEc:sls:ipmsls:v:25:y:2013:5
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  1. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  2. Timmer,Marcel P. & Inklaar,Robert & O'Mahony,Mary & Ark,Bart van, 2010. "Economic Growth in Europe," Cambridge Books, Cambridge University Press, number 9780521198875, November.
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  7. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1995. "Capital Utilization and Returns to Scale," CEPR Discussion Papers 1221, C.E.P.R. Discussion Papers.
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  9. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, December.
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