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What Does It Take to Explain Procyclical Productivity?

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  • Wen Yi

    (Cornell University)

Abstract
Labor productivity comoves strongly with output, leads output and employment, and is only weakly correlated with employment. Procyclical productivity is observed in virtually all countries and industries, and it is observed even in periods of fluctuations due to pure demand shocks, such as during the Great Depression and the second World War. This paper shows that a standard RBC model driven by demand shocks alone is able to explain procyclical productivity without the need to resort to technology shocks or increasing returns to scale. The key element is labor hoarding due to adjustment cost of labor. It is also shown that the observed cross-country differences in productivity cycles can be rationalized by a single parameter alone - the size of the adjustment cost of labor.

Suggested Citation

  • Wen Yi, 2004. "What Does It Take to Explain Procyclical Productivity?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-40, June.
    • Handle: RePEc:bpj:bejmac:v:contributions.4:y:2004:i:1:n:5
    DOI: 10.2202/1534-6005.1180
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    3. Anneleen Vandeplas & Anna Thum-Thysen, 2019. "Skills Mismatch and Productivity in the EU," European Economy - Discussion Papers 100, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Michel Dumont, 2011. "Working Paper 11-11 - A decomposition of industry-level productivity growth in Belgium using firm-level data," Working Papers 1111, Federal Planning Bureau, Belgium.
    5. Hashmat Khan & John Tsoukalas, 2005. "Technology Shocks and UK Business Cycles," Macroeconomics 0512006, University Library of Munich, Germany.
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    8. Wen, Yi, 2003. "On the Optimal Volume of Labor Hoarding," Working Papers 03-14, Cornell University, Center for Analytic Economics.
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    10. Kevin x.d. Huang & Jie Chen & Zhe Li & Jianfei Sun, 2014. "Financial Conditions and Slow Recoveries," Vanderbilt University Department of Economics Working Papers 14-00004, Vanderbilt University Department of Economics.
    11. Wang, Peng-fei & Wen, Yi, 2005. "Endogenous money or sticky prices?--comment on monetary non-neutrality and inflation dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1361-1383, August.
    12. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
    13. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 1-23, January.
    14. Jiang, Mingming, 2016. "By force of demand: Explaining cyclical fluctuations of international trade and government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 249-267.
    15. Wang, Pengfei & Wen, Yi & Xu, Zhiwei, 2014. "What inventories tell us about aggregate fluctuations—A tractable approach to (S,s) policies," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 196-217.
    16. Yi Wen, 2005. "By force of demand: explaining international comovements and the saving-investment correlation puzzle," Working Papers 2005-043, Federal Reserve Bank of St. Louis.
    17. Wen, Yi, 2006. "Demand shocks and economic fluctuations," Economics Letters, Elsevier, vol. 90(3), pages 378-383, March.
    18. Luõs Aguiar-Conraria & Yi Wen, 2007. "Understanding the Large Negative Impact of Oil Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 925-944, June.
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    20. Wang, Peng-fei & Wen, Yi, 2006. "Another look at sticky prices and output persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2533-2552, December.
    21. Colombier, Carsten, 2011. "Konjunktur und Wachstum [Business cycles fluctuations and long-term growth]," MPRA Paper 104739, University Library of Munich, Germany.
    22. Patrick Fracois & Huw Lloyd-Ellis, 2005. "Schumpeterian Restructuring," Working Paper 1039, Economics Department, Queen's University.
    23. Jiang, Mingming, 2017. "On demand shocks and international business cycle puzzles," Economics Letters, Elsevier, vol. 160(C), pages 29-32.
    24. Cook, David & Xu, Juanyi, 2015. "Eurosclerosis and international business cycles," Journal of International Economics, Elsevier, vol. 95(1), pages 54-67.
    25. Manzoor Ahmad & Jianghuai Zheng, 2023. "The Cyclical and Nonlinear Impact of R&D and Innovation Activities on Economic Growth in OECD Economies: a New Perspective," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(1), pages 544-593, March.

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