Vanishing Procyclicality of Productivity? Industry Evidence
The robust performance of U.S. labor productivity (LP) early in the recovery from the Great Recession contrasts markedly with the sluggish growth of output, and even more with the lack of recovery in employment. This pattern has renewed interest in understanding why productivity has become much less procyclical in recent decades. This is an important topic because the cyclicality of productivity has implications for how we model business cycles, and our understanding of how they are propagated. The topic also has implications for monetary policy because it affects the trend-cycle decomposition and in turn the projection of trend growth as well as the assessment of the economy's output gap. A number of papers have investigated the aggregate time-series data and proposed mechanisms that may explain the observed changes. Those papers rely entirely on dynamic stochastic general equilibrium models. This study, in contrast, uses the cross-industry dimension as an alternative and complementary method for identifying the mechanisms that have led to the diminished procyclicality of productivity.