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Labor productivity, effort and the euro-area business cycle

Author

Listed:
  • Vivien Lewis

    (Deutsche Bundesbank)

  • Stefania Villa

    (Banca d'Italia)

Abstract

Labor productivity is highly procyclical in the euro area. We investigate the sources of this procyclicality in an estimated New Keynesian business cycle model with labor search frictions and variable factor utilization in both capital and labor. Labor input can vary along three margins: employment, hours, and effort (or utilization). We find evidence for a significant use of the effort margin in labor adjustment. Moreover, a model that uses effort outperforms one with variable capital utilization or dominant technology shocks. Finally, the effort margin dampens inflation volatility.

Suggested Citation

  • Vivien Lewis & Stefania Villa, 2026. "Labor productivity, effort and the euro-area business cycle," Temi di discussione (Economic working papers) 1522, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1522_26
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    3. Diwambuena, Josué & Fonseca, Raquel & Schubert, Stefan, 2025. "Labor market institutions, productivity, and the business cycle: An application to Italy," European Economic Review, Elsevier, vol. 178(C).
    4. Matthias S. Hertweck & Vivien Lewis & Stefania Villa, 2021. "Going the Extra Mile: Effort by Workers and Job‐Seekers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2099-2127, December.
    5. Gantert, Konstantin, 2022. "The impact of active aggregate demand on utilisation-adjusted TFP," IWH Discussion Papers 9/2022, Halle Institute for Economic Research (IWH).
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    7. Kim, Minseung & Shim, Myungkyu, 2020. "Variable Effort, Business Cycles, and Economic Welfare," Economics Letters, Elsevier, vol. 196(C).

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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