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Productivity Growth over the Business Cycle: Cleansing Effects of Recessions

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  • Jeroen Van den bosch
  • Stijn Vanormelingen

Abstract

This paper investigates the impact of recent recessions on the origins of productivity growth. We show how business cycles affect productivity growth, with particular attention for the impact of job reallocation and labor hoarding. We find evidence that recessions induce productivity enhancing job reallocation in manufacturing but not in services industries and show that labor hoarding mitigates this cleansing effect of recessions. Furthermore, we show how entry and exit of firms and industry dynamics shape the evolution of aggregate productivity. Plain English Summary During recessions, governments support firms via temporary unemployment programs to save jobs. A side effect is that job reallocation and exit of low-productive firms can be distorted, while such cleansing effects typically spur productivity growth. This paper investigates how recessions affect productivity growth, with particular attention for the impact of job reallocation and labor hoarding. We find evidence that recessions induce productivity enhancing job reallocation in manufacturing but not in services industries and show that labor hoarding mitigates this cleansing effect of recessions. Furthermore, we show how entry and exit of firms and industry dynamics shape the evolution of aggregate productivity. As many developed economies struggle with a slowdown in productivity growth, it is important that policy makers understand the impact of recessions on the micro origins of productivity growth and are aware of how temporary policies during recessions could affect long-term productivity growth.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jeroen Van den bosch & Stijn Vanormelingen, 2017. "Productivity Growth over the Business Cycle: Cleansing Effects of Recessions," Working Papers of VIVES - Research Centre for Regional Economics 600374, KU Leuven, Faculty of Economics and Business (FEB), VIVES - Research Centre for Regional Economics.
    • Handle: RePEc:ete:vivwps:600374
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    2. Konings, Jozef & Magerman, Glenn & Van Esbroeck, Dieter, 2023. "The impact of firm-level Covid rescue policies on productivity growth and reallocation," European Economic Review, Elsevier, vol. 157(C).
    3. Richards, Timothy J. & Paudel, Ujjwol, 2025. "Minimum Wages and Employment," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 361159, Agricultural and Applied Economics Association.
    4. Gert Bijnens & Natalia Bermudez & Bart Cockx, 2025. "The impact of short-time work during the great recession," Working Paper Research 481, National Bank of Belgium.
    5. Ardiyono, Sulistiyo K. & Patunru, Arianto A., 2023. "Firms’ responses to foreign demand shocks: Evidence from Indonesia after the global financial crisis," Economic Modelling, Elsevier, vol. 128(C).
    6. Goswami, Diti, 2024. "Aggregate productivity, economic fluctuations, and export orientation: Evidence from India," Structural Change and Economic Dynamics, Elsevier, vol. 70(C), pages 581-593.
    7. André A. Castro & Philipp Ehrl, 2025. "Lean on me, firm: evidence from a management consulting program," Small Business Economics, Springer, vol. 65(1), pages 61-78, June.

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