Labor productivity: Structural change and cyclical dynamics

A longstanding issue in empirical economics is the behavior of average labo r productivity over the business cycle. This paper provides new insights in to the cyclicality of aggregate labor productivity by examining the cyclica l behavior of productivity at the plant level as well as the role of reallo cation across plants over the cycle. We find that plant-level productivity is even more procyclical than aggregate productivity, because short-run rea llocation yields a countercyclical contribution to labor productivity. At t he plant level, we find that cyclicality of productivity varies systematica lly with long-run employment growth. Over the course of the cycle, plants t hat are long-run downsizers exhibit significantly greater procyclicality of productivity than do long-run upsizers. When we control for the direction of a cyclical shock, we find that the fall in productivity from an adverse cyclical shock for long-run downsizers is significantly larger in magnitude than is the fall in productivity from an equivalent adverse cyclical shock for long-run upsizers. We argue that these findings raise questions about one of the most popular explanations of procyclical productivity: changing factor utilization over the cycle.