Procyclical Labor Productivity and Competing
Theories of the Business Cycle: Some Evidence
from Interwar U.S. Manufacturing Industries
WITH MARTIN PARKINSON
Since its discovery by Hultgren (1960), the procyclical behavior of average labor productivity, also known as short-run increasing returns to labor (SRIRL), has achieved the status of a basic stylized fact of macroeconomics. The ubiquitous nature of procyclical productivity has been confirmed by studies at levels of aggregation ranging from the firm to the national economy, and for a variety of countries and sample periods.
Much of the original research on procyclical productivity was undertaken during the 1960s and early 1970s, contributions being made by Brechling (1965), Kuh (1965), Ball and St. Cyr (1966), Solow (1968), Fair (1969), and Sims (1974), among others. More recently, attention has been refocused on SRIRL in the context of research on real business cycles (Prescott 1986b) and by the work of Fay and Medoff (1985), Hall (1987, 1988a, 1988b), Rotemberg and Summers (1988), and Chirinko (1989). The reason for the renewed interest in SRIRL is that, as has become increasingly clear, the choice of explanation of SRIRL effectively entails a choice among some leading contemporary models of the business cycle.
Three major explanations for SRIRL have been advanced: technology shocks, true increasing returns, and labor hoarding. Each explanation is closely associated with a competing model of the cycle.
The technology shocks explanation is favored by the competitive real business cycle approach, as exposited by Prescott (1986b). In the real business cycle model, changes in technology are the driving force behind cyclical fluctuations, and intertemporal substitution in labor supply is a key propaga-
Reprinted with permission from Journal of Political Economy, vol. 99, no. 31 (1991). Copy-
right © 1991 by The University of Chicago. All rights reserved.
We thank the referee for useful comments. Financial support from, respectively, the National
Science Foundation and the Australian Treasury is gratefully acknowledged. Views expressed
are our own and should not be attributed to the Treasury.