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What are the drivers of Labor Productivity?

Author

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  • Josué Diwambuena

    (ESG-Université du Québec à Montréal)

  • Francesco Ravazzolo

    (Free University of Bozen-Bolzano, Italy; CAMP, BI Norwegian Business School, Norway; RCEA)

Abstract

We propose a new structural VAR with four shocks identified via sign restrictions to identify the drivers of labor productivity in Italy for the period spanning 1996Q1-2018Q4. In particular, we disentangle two supply shocks (productivity and labor supply shocks) and two demand shocks: (i) a demand shock that triggers a positive correlation between output and total hours (demand 1 shock) and (ii) a demand shock that allows for a negative correlation between these two variables (demand 2 shock). We find that the latter demand shock is the dominant source of variations in labor productivity across horizons. Furthermore, the productivity shock is an important driver of labor productivity fluctuations in the short run while labor market shocks are important drivers at longer horizons. We show that the productivity, labor supply, and demand 2 shocks trigger procyclical reactions to labor productivity while the demand 1 and wage bargaining shocks generate countercyclical reactions to productivity. The procyclical response of labor productivity to the demand 2 shock indicates the use of labor hoarding, thereby supporting that firms adjust more the intensive margin. The countercyclical response of labor productivity to the demand 1 shock suggests that firms are eager to adjust the extensive margin when the expected duration of the business cycle phase is persistent.

Suggested Citation

  • Josué Diwambuena & Francesco Ravazzolo, 2022. "What are the drivers of Labor Productivity?," BEMPS - Bozen Economics & Management Paper Series BEMPS86, Faculty of Economics and Management at the Free University of Bozen.
    • Handle: RePEc:bzn:wpaper:bemps86
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    Cited by:

    1. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2023. "Labor Market Institutions, Productivity, and the Business Cycle: An Application to Italy," Cahiers de recherche / Working Papers 2302, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.

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    More about this item

    Keywords

    Labor productivity; VAR; sign restrictions.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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