Working Paper: NBER ID: w12046
Authors: Ellen McGrattan; Edward Prescott
Abstract: During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity.
Keywords: market hours; productivity; intangible investment; expensed investment; sweat equity
JEL Codes: E3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dramatic increase in US market hours during the 1990s (N22) | significant unmeasured intangible investments (E22) |
| significant unmeasured intangible investments (E22) | productivity boom (O49) |
| Ignoring intangible investments (E22) | distorted view of the US economy during the 1990s (P19) |
| Traditional measures of productivity (O49) | underestimate actual productivity (E23) |
| Including intangible investments (E22) | corrected understanding of productivity growth (O49) |
| Rapid technological progress (O39) | increase in market hours (G14) |