Vanishing Procyclicality of Productivity? Industry Evidence

Labor productivity (LP) in the United States has gone from being procyclical to acyclical since the mid1980s. Using industry-level data, this paper first shows that total factor productivity (TFP), which is LP net of capital deepening, has also become much less correlated with output as well as inputs over the same period. Moreover, the bulk of the decline in aggregate TFP’s cyclicality is attributable to service industries. This paper then uses the industry data to investigate the reasons for the change in the cyclicality of productivity. By decomposing TFP into technical change and input utilization, it finds that TFP’s correlation with inputs has fallen and that the main reason for this decline is that technology shocks, which remain negatively correlated with inputs (that is, contractionary) in the short run, have come to account for a larger share of the fluctuations in TFP. Evidence suggests that this change is the result of more flexible labor markets together with more persistent technology shocks since the mid1980s, causing firms to do less adjustment along the intensive margin. By comparison, the evidence does not appear to support the competing hypothesis that the reduction in the productivity-input correlation could be due to increasing investment in intangible capital.