Learning by necessity: Government demand, capacity constraints, and productivity growth

This paper studies how firms adapt to demand shocks when facing capacity constraints. I show that increases in government purchases raise total factor productivity measured in quantity units (TFPQ) at the production-line level. Most of the productivity gains are concentrated in plants facing tighter capacity constraints, a phenomenon I call “learning by necessity”. The evidence is based on newly digitized and detailed data on production, productivity, and capacity utilization from archival sources on US World War II aircraft production. Shifts in military strategy provide an instrument for aircraft demand at the production-line level. I show that plants adapted to surging demand by improving production methods, outsourcing, and combating absenteeism, but did so primarily when facing tighter capacity constraints. Greater wartime production is also associated with more patenting in the decade following the war for capacity constrained plants. The study speaks to a long historical debate on whether and how demand factors can affect productivity growth.