Average labour productivity dynamics over the business cycle
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Average labour productivity dynamics over the business cycle Andrew E. Evans1 Received: 6 May 2018 / Accepted: 9 April 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract An unobserved components model is used to analyse the cyclicality of average labour productivity in Australia since 1980. The model includes a direct estimate of phase shift so that the lead or lag of cycles relative to output can be determined. Average labour productivity is found to be countercyclical with output and employment and lagging the cycle in output by about six quarters. The observations are consistent with a theoretical model in which employment adjustment costs are falling due to lower turnover in employment. A more flexible labour market allows greater variation in employment relative to variation in output which tends to make productivity more countercyclical. The model is also used to determine the relative importance of the intensive and extensive margins of labour supply by examining fluctuations in both employment rates and average hours per worker. The full-time employment rate is significantly procyclical and lagging output as expected. The part-time employment rate is countercyclical, suggesting that there is some substitution of part time for fulltime workers during economic downturns. At the intensive margin, average hours are procyclical, but they make a smaller contribution to the cyclicality of productivity than the employment rate. Keywords Labour productivity · Business cycle · Extensive margin · Intensive margin JEL classification: C32 · E32 · O47
1 Introduction This article looks at the question of whether average labour productivity (ALP) is procyclical in Australia using quarterly data since 1980 on output, employment and
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Andrew E. Evans [email protected] Macquarie University, Sydney, NSW 2109, Australia
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A. E. Evans
hours worked. The relative contributions of variation at the extensive margin (number of employees) and intensive margin (hours per employee) are also measured. Evidence from the USA has found that average labour productivity has become less procyclical or even countercyclical since the mid-1980s (Stiroh 2009; Barnichon 2010; Fernald and Wang 2016; Galí and van Rens 2019). Evidence from countries outside the USA has been mixed, with Daly et al. (2011) finding that for a typical country in a group of 14 OECD countries, productivity shifted from procyclical to countercyclical in the decades prior to the Great Recession, but tended to become procyclical again afterwards. Long-run growth in productivity is what matters most to growth in output and income per capita, since it is not limited by constraints which apply to the growth of labour and capital inputs to production. However, it is also important to try and understand the dynamic behaviour of productivity in times of rapid change in economic conditions, such as during a recession and the recovery phase of the business cycle. The business cycle behaviour of productivity is also important because of the supp
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