DP19569 A New Interpretation of U.S. Productivity Growth Dynamics, 1950-2023
This paper provides a unified framework that resolves recent puzzles in U.S. productivity growth that we show are interrelated. First, why was productivity growth in the 2010-19 decade the slowest of any decade in U.S. history? Second, why did the cyclicality of productivity growth change from procyclical in 1950-85 to acyclical in 1986-2006 and then back to procyclical in 2010-19? Third, why was productivity growth strongly countercyclical in the recessions of 2008-09 and 2020? The fundamental dynamic driving cyclical productivity fluctuations originates in the gradual adjustment of hours of work to demand-driven output fluctuations due to the costs of hiring and firing labor. Since productivity growth is a residual, equal to output growth less hours growth, productivity growth immediately jumps in response to an upward output movement because hours are slow to respond; then productivity growth falls back in subsequent quarters as hours complete their adjustment. We are able to explain the temporary 1986-2006 disappearance of procyclicality as the result of changes in the standard deviation and serial correlation of output changes.
We explain countercyclical productivity surges in 2008-09 and 2020 by showing that business firms in those two episodes overreacted with “excess layoffs,” cutting hours in response to the sharp output decline with a much higher elasticity than normal. By coupling these excess layoffs with a post-recession rehiring effect that gradually unwound the excess layoffs, our regression analysis explains why productivity growth on average was so slow in 2010-19. If this recession/rehiring effect had not occurred, productivity growth in the 2010-19 decade would have been 1.9 percent per year instead of 1.1 percent, suggesting that concern about U.S. “secular stagnation” has been overstated.
