Bryan Caplan  

Even Bigger Than Arnold Thinks

Story of the Year... Inefficient Subsidies...

Arnold's right that high labor productivity growth over the past five years is a big story. But this fact is even more impressive because labor productivity is normally procyclical. That means that during recessions, labor productivity typically falls (or at least rises at a below-average rate). The fact that it has risen to a post-war high despite the downturn of the early 2000's is truly impressive.

Why is labor productivity procyclical? The standard Keynesian answer is "labor hoarding." During recessions, firms retain workers who are temporarily unnecessary because they want to save the trouble of rehiring once conditions pick up again. The result is that production falls more than employment, so measured output per worker declines. The real business cycle explanation, in contrast, is that the decline in labor productivity is caused by "technology shocks," which in turn optimally leads to lower employment. (Here's a paper that splits the difference, concluding that both sides are half right).

Whichever theory you buy, however, record labor productivity growth during a period marked by recession is amazing. Good call, Arnold.

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COMMENTS (2 to date)
Barkley Rosser writes:


Really, I think you are overdoing it here. The recession was brief and only in 2001. So, we have seen all kinds of labor productivity increases since then? Well, this is interesting, but it is not in the face of some ongoing recession.

BTW, just what are those "negative technology shocks" that the RBC people claim cause recessions? Can anyone name one? Is a price increase in oil an example? I do not think so conceptually, although that seems to be the prime example put forward by these folks.

I can grant that they do happen, e.g. the burning of the Library of Alexandria, or the wiping out of both capital stock and educated people during the fall of the Roman Empire. But much shorter term macro fluctuations would not seem to involve such events.

Lord writes:

So labor productivity isn't procyclical anymore. Is that an improvement?

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