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Why have the dynamics of labor productivity changed?

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  • Willem Van Zandweghe

Abstract

The strength of the nascent economic recovery--and of the labor market--will depend importantly on labor productivity. By itself, faster productivity growth contributes to faster output growth. At the same time, stronger productivity gains allow firms to increase output without adding workers. Some analysts believe that faster productivity growth contributed to the ?jobless recoveries? after the 1990-91 and 2001 recessions. ; In recent years, the U.S. economy has undergone a change in the behavior of productivity over the business cycle. Until the mid-1980s, productivity growth rose and fell with output growth. But since then the relationship between these two variables has weakened, and they have even moved in different directions. ; Fluctuations in productivity depend on two factors: the mix of shocks that drive the business cycle and the transmission of those shocks to output and labor market activity. Thus, two hypotheses stand out as plausible explanations for the change in the cyclical behavior of productivity. First, a decline in the importance of supply shocks for the business cycle may have changed the relationship of productivity and output over the business cycle. Second, structural changes in the labor market may have altered the transmission of shocks to the labor market and production. Specifically, a different labor market environment may have prompted firms to modify the way they meet their labor needs in response to shocks to the economy. ; Van Zandweghe examines the shift in the behavior of labor productivity over the business cycle and assesses the supply shock and structural change explanations for the shift. He finds that the importance of supply shocks in the business cycle has been stable over time. However, the behavior of productivity over the business cycle has shifted in response to both supply and demand shocks. Together, these results imply the shift in the business cycle behavior of productivity is most likely the result of structural changes in the labor market.

Suggested Citation

  • Willem Van Zandweghe, 2010. "Why have the dynamics of labor productivity changed?," Economic Review, Federal Reserve Bank of Kansas City, vol. 95(Q III), pages 5-30.
    • Handle: RePEc:fip:fedker:y:2010:i:qiii:p:5-30:n:v.95no.3
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    References listed on IDEAS

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    1. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
    2. repec:cbo:report:418806 is not listed on IDEAS
    3. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
    4. repec:cbo:report:418804 is not listed on IDEAS
    5. repec:cbo:report:418805 is not listed on IDEAS
    6. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
    7. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
    8. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
    9. repec:cbo:report:418807 is not listed on IDEAS
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    Cited by:

    1. Maarten Dossche & Andrea Gavazzi & Vivien Lewis, 2023. "Labor Adjustment and Productivity in the OECD," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 111-130, January.
    2. Harrison, Rupert & Jaumandreu, Jordi & Mairesse, Jacques & Peters, Bettina, 2014. "Does innovation stimulate employment? A firm-level analysis using comparable micro-data from four European countries," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 29-43.
    3. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2022. "How Sticky Wages in Existing Jobs Can Affect Hiring," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(1), pages 1-37, January.
    4. Maarten Dossche & Andrea Gavazzi & Vivien Lewis, 2023. "Labor Adjustment and Productivity in the OECD," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 111-130, January.
    5. Mitra, Aruni, 2024. "The productivity puzzle and the decline of unions," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).
    6. Luigi Aldieri & Concetto Paolo Vinci, 2018. "Green Economy and Sustainable Development: The Economic Impact of Innovation on Employment," Sustainability, MDPI, vol. 10(10), pages 1-11, October.
    7. Seip, Knut L. & McNown, Robert, 2013. "Monetary policy and stability during six periods in US economic history: 1959–2008: a novel, nonlinear monetary policy rule," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 307-325.

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