Thursday, March 4, 2010

Cyclicality of Labor Productivity

Most economists teach productivity is, obviously a key factor in long-run growth. But also, many teach that (as much data shows across time and across regions) that productivity has tended to be pro-cyclical - that it rises during boom times and falls during bad times. This obviously is not the case this time around.

Many less 'classical'-leaning economists claim that cyclicality of labor productity is not that simple - that it depends on what kind of economic cycle we are talking about. Supply shocks could potentially induce pro-cyclical productivity (one theory is that of 'labor hoarding'), but demand shocks like the one we are currently experiencing should, by their very nature of layoffs and cut hours, cause counter-cyclical behavior as those left with jobs are forced to do twice as much work in a given day (as the article notes).

So, I'm left with wondering again, what's the purpose of aggregation in macroeconomics if it leaves you with misleading results during times when analysis could really could use a little bit of realism.

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