The Vanishing Procyclicality of Labour Productivity

Jordi Galí,Thijs Van Rens

doi:10.1093/ej/ueaa065

Abstract

AbstractWe document two changes in post-war US macroeconomic dynamics: the procyclicality of labour productivity vanished, and the relative volatility of employment rose. We propose an explanation for these changes that is based on reduced hiring frictions due to improvements in information about the quality of job matches and the resulting decline in turnover. We develop a simple model with hiring frictions and variable effort to illustrate the mechanisms underlying our explanation. We show that our model qualitatively and quantitatively matches the observed changes in business cycle dynamics.

Highlights

We document two changes in post-war US macroeconomic dynamics: the procyclicality of labour productivity vanished, and the relative volatility of employment rose
Understanding the link between these three phenomena may shed some light on the nature of some of the structural changes experienced by the US economy over the past decades, which should be of interest to economists doing research on business cycles, labour markets and other related fields
In order to illustrate the possible link between a reduction in labour market frictions and changes in business cycle dynamics, we develop a stylised model of fluctuations with a frictional labour market and investigate how its predictions vary with the level of labour market turnover

Summary

Introduction

We document two changes in post-war US macroeconomic dynamics: the procyclicality of labour productivity vanished, and the relative volatility of employment rose. Around the same time as these changes in business cycle dynamics were taking place, there was a secular decline in labour market turnover. Understanding the link between these three phenomena may shed some light on the nature of some of the structural changes experienced by the US economy over the past decades, which should be of interest to economists doing research on business cycles, labour markets and other related fields. In order to illustrate the possible link between a reduction in labour market frictions and changes in business cycle dynamics, we develop a stylised model of fluctuations with a frictional labour market and investigate how its predictions vary with the level of labour market turnover. The size of the decline in turnover in the USA is well documented, and we show that the observed decline is sufficient to quantitatively generate the reduction in frictions needed to explain the changes in labour market dynamics

Results

Discussion

Conclusion