Working Paper: NBER ID: w14729
Authors: Casey Mulligan
Abstract: A labor market tautology says that any change in labor usage can be decomposed into a movement along a marginal productivity schedule and a shift of the schedule. I calculate this decomposition for the recession of 2008, assuming an aggregate Cobb-Douglas marginal productivity schedule, and find that all of the decline in employment and hours since December 2007 is a movement along the schedule. This finding suggests that a reduction in labor supply and/or an increase in labor market distortions are major factors in the 2008 recession. The decline in aggregate consumption suggests that the reduction in labor supply (if any) is neither a wealth nor an intertemporal substitution effect. "Sticky real wages" or the emergence of significant work disincentives are possible explanations for these findings.
Keywords: Recession; Labor Productivity; Labor Market Distortions
JEL Codes: E24; E32; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor supply reductions (J20) | decline in employment (J63) |
| increased labor market distortions (J48) | decline in employment (J63) |
| upward shift in labor market distortions (J49) | observed employment decline (J63) |
| normal productivity growth (O49) | unique character of recession (E32) |
| labor distortions (J89) | more than 100% of observed employment decline (J68) |
| decline in consumption expenditures (E20) | labor supply shifts cannot be explained by wealth effects (J29) |