Towards a Theory of Capacity Utilization: Shiftwork and the Workweek of Capital

Among the large number of economic indicators that provide information on the current or future state of the economy, the index of capacity utilization (CU) published by the Federal Reserve Board is one of the more prominent. Low levels of the CU index number tend to be associated with below-average aggregate activity, and high levels are supposed to indicate inflationary pressures (Corrado and Mattey 1997).1 For the most part, CU is an empirical concept that is only loosely related to economic theory, and until recently it has not played an important role in models of the business cycle. There are various interpretations of what CU means, but in this article I address one particular aspect of CU from the point of view of standard production theory. I first review some empirical evidence on the workweek of capital, a measure that makes the concept of CU operational. I then extend standard production theory to incorporate the workweek of capital into the neoclassical growth model. Finally, I argue that recent attempts to use variations in the workweek of labor in order to get CU-adjusted measures of short-term productivity growth are potentially misguided, since the workweek of labor is not an unbiased measure of the workweek of capital. The Board’s CU index is defined as the ratio of actual output to potential output. Potential output reflects “sustainable practical capacity, defined as the