Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?
Measured productivity is strongly procyclical. Real business cycle theories suggest that actual fluctuations in productivity are the source of fluctuations in aggregate output. Keynesian theories maintain that fluctuations in aggregate output come from shocks to aggregate demand. Keynesian theories appeal to labor hoarding or off the production function behavior to explain the procyclicality of productivity. If observed productivity shocks are true productivity shocks, a function of factor prices should covary exactly with productivity. In annual data for U.S. industries, that function of factor prices and conventionally-measured productivity move together very closely. Moreover, their difference is uncorrelated with aggregate output.
|Date of creation:||Feb 1987|
|Date of revision:|
|Publication status:||published as Shapiro, Matthew D. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks of Demand Shocks?" From The American Economic Review, Vol. 77, No. 2, pp. 118-124, (May 1987).|
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