What Caused the Recession of 2008? Hints from Labor Productivity

30 Pages Posted: 17 Feb 2009 Last revised: 20 Feb 2009

See all articles by Casey B. Mulligan

Casey B. Mulligan

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: February 2009

Abstract

A labor market tautology says that any change in labor usage can be decomposed into a movement along a marginal productivity schedule and a shift of the schedule. I calculate this decomposition for the recession of 2008, assuming an aggregate Cobb-Douglas marginal productivity schedule, and find that all of the decline in employment and hours since December 2007 is a movement along the schedule. This finding suggests that a reduction in labor supply and/or an increase in labor market distortions are major factors in the 2008 recession. The decline in aggregate consumption suggests that the reduction in labor supply (if any) is neither a wealth nor an intertemporal substitution effect. "Sticky real wages" or the emergence of significant work disincentives are possible explanations for these findings.

Suggested Citation

Mulligan, Casey B., What Caused the Recession of 2008? Hints from Labor Productivity (February 2009). NBER Working Paper No. w14729. Available at SSRN: https://ssrn.com/abstract=1344709

Casey B. Mulligan (Contact Author)

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