Working Paper: NBER ID: w4415
Authors: Michael D. Bordo; Charles L. Evans
Abstract: In a recent paper, Bemanke and Parkinson (1991) studied interwar U.S. manufacturing data with the objective of assessing competing theories of the business cycle. An important finding was that short-run increasing returns to Labor (SRIRL), or procyclical labor productivity, was at least as strong during the Great Depression as in the postwar period. The authors conclude that this information casts further doubt on the real business cycle explanation of economic fluctuations. The purpose of this note is to point out that, within the data set analyzed by Bemanke and Parkinson (20% of the manufacturing sector), labor productivity during the Great Depression (1928:III to 1933:1) was procyclical in some industries and countercyclical in others. Furthermore, our measure of labor productivity for the entire manufacturing sector during this period was countercyclical. We conclude that the evidence is not favorable toward the hypothesis that large, negative aggregate demand shocks pushed the 1929-33 economy down a static, neoclassical production function. Another possibility is that firms which typically hoarded labor during recessions chose not to do so during the 1929-33 period.
Keywords: Labor Productivity; Great Depression; Business Cycle; Aggregate Demand Shock
JEL Codes: N1; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms did not hoard labor as expected during economic downturns (J23) | Labor productivity was countercyclical for the entire manufacturing sector during the period of 1929 to 1933 (D24) |
| Labor productivity was countercyclical for the entire manufacturing sector during the period of 1929 to 1933 (D24) | Economic activity decreased (N12) |
| Economic activity decreased (N12) | Labor productivity was countercyclical for the entire manufacturing sector during the period of 1929 to 1933 (D24) |
| Cyclical behavior of labor productivity varied across different industries (O49) | Labor productivity was countercyclical for the entire manufacturing sector during the period of 1929 to 1933 (D24) |
| Procyclical productivity in some industries (O49) | Labor productivity was countercyclical for the entire manufacturing sector during the period of 1929 to 1933 (D24) |
| Procyclical labor productivity during the Great Depression (E24) | Challenges the static neoclassical production function hypothesis (E23) |
| Labor hoarding and increasing returns as primary explanations (J23) | Procyclical productivity challenges the technological shock theory (O49) |