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Procyclical productivity : evidence from an emerging economy

  • Lucas Navarro
  • Raimundo Soto

Average productivity tends to rise during booms and fall during recessions. This fact is at odds with classical macroeconomic theories which suggest that labor productivity should be countercyclical due to the law of diminishing returns to factors. Theoretical explanations for this puzzle include exogenous changes in production technology, increasing returns to scale, measurement errors due to unobserved input variations, external economies and composition effects at the aggregate level. Surprisingly, aggregate data for the Chilean industry show that productivity is countercyclical. This paper has two objectives. First, we study the cyclical behavior of productivity in 84 sectors of the Chilean industry in the 1979-1997 period. We find that, contrary to the results obtained using aggregate indexes, disaggregated data confirm that on average productivity is unambiguously procyclical. The main reason for this difference is that aggregate data provides a distorted assessment of the cyclical component of productivity due to the marked heterogeneity of behavior between sectors. Second, we examine the determinants of productivity in the Chilean industry using an econometric model that allow us to quantify the relative contribution of the four different explanations of procyclical productivity. The results indicate that technology shocks account for 50% of productivity cycles in the 1979-1997 period, thus supporting the supply shocks hypothesis as the main source of business cycles in Chile. The other 50% of the productivity shocks is explained by important reallocation effects among sectors of different productivity and, more recently, by the presence of increasing returns. Variations in the utilization of capital and labor effort were insignificant.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 109.

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Date of creation: Oct 2001
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Handle: RePEc:chb:bcchwp:109
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  1. Martin N. Baily & Eric J. Bartelsman & John Haltiwanger, 1996. "Labor productivity: structural change and cyclical dynamics," Finance and Economics Discussion Series 96-10, Board of Governors of the Federal Reserve System (U.S.).
  2. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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  4. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2001. "A Decade Lost and Found: Mexico and Chile in the 1980s," NBER Working Papers 8520, National Bureau of Economic Research, Inc.
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  9. Bernanke, Ben S & Parkinson, Martin L, 1991. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 439-59, June.
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  12. Raphael Bergoeing & Raimundo Soto, 2002. "Testing Real Business Cycles Models in an Emerging Economy," Working Papers Central Bank of Chile 159, Central Bank of Chile.
  13. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices kehoe02, Review of Economic Dynamics.
  14. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  15. Aizcorbe, Ana M, 1992. "Procyclical Labour Productivity, Increasing Returns to Labour and Labour Hoarding in Car Assembly Plant Employment," Economic Journal, Royal Economic Society, vol. 102(413), pages 860-73, July.
  16. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  17. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Data Appendix to A Decade Lost and Found: Mexico and Chile in the 1980s," Technical Appendices bergoeing02, Review of Economic Dynamics.
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