Working Paper: NBER ID: w2591
Authors: Julio J. Rotemberg; Lawrence H. Summers
Abstract: Hall has pointed out that, when there is perfect competition and price flexibility, labor hoarding alone will not induce the Solow residual measured using labor's share in revenues to be procyclical. We show that, even with perfect competition, a small amount of price rigidity - we assume firms must set price slightly before the level of demand becomes known - makes the extent of procyclical productivity depend mainly on the extent of labor hoarding. We show that indeed, whether productivity is measured via the Solow method using labor's share in revenues or using other methods, it tends to be more procyclical in industries and in nations where labor hoarding is more important
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor hoarding (J23) | procyclical productivity (O49) |
| price rigidity (D41) | procyclical productivity (O49) |
| labor hoarding + price rigidity (J23) | procyclical productivity (O49) |
| labor hoarding (J23) | output decline (E23) |
| hoarded labor utilization (J23) | productivity increase (O49) |
| rigid prices (D41) | Solow residual increase (O41) |