Seasonal Solow Residuals and Christmas: A Case for Labor Hoarding and Increasing Returns

In aggregate unadjusted data, measured Solow residuals exhibit large seasonal variations. Total Factor Productivity grows rapidly in the fourth quarter at an annual rate of 16 percent and regresses sharply in the ...rst quarter at an annual rate of ¡24 percent. This paper considers two potential explanations for the measured seasonal variation in the Solow residual: labor hoarding and increasing returns to scale. Using a speci...cation that allows for no exogenous seasonal variation in technology and a single seasonal demand shift in the fourth quarter, we ask the following question: How much of the total seasonal variation in the measured Solow residual can be explained by Christmas? The answer to this question is surprising. With increasing returns and time varying labor e¤ort, Christmas is su¢cient to explain the seasonal variation in the Solow residual, consumption, average productivity, and output in all four quarters. Our analysis of seasonally unadjusted data uncovers important roles for labor hoarding and increasing returns which are di¢cult to identify in adjusted data. JEL Classi...cations: 131, 023 ¤Braun, Federal Reserve Bank of Minneapolis; Evans, Federal Reserve Bank of Chicago. We thank Marty Eichenbaum, Jim Hamilton, Bob Chirinko, Julio Rotemberg, and Jim Nason for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.