Procyclical Productivity: Increasing Returns or Cyclical Utilization?

44 Pages Posted: 17 Jul 2000 Last revised: 24 Sep 2010

See all articles by Susanto Basu

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1995

Abstract

It has long been argued that cyclical fluctuations in labor and capital utilization and the presence of overhead labor and capital are important for explaining procyclical productivity. Here I present two simple and direct tests of these hypotheses, and a way of measuring the relative importance of these two explanations. The intuition behind the paper is that materials input is likely to be measured with less cyclical error than labor and capital input, and materials are likely to be used in strict proportion to value added. In that case, materials growth provides a good measure of the unobserved changes in capital and labor input. Using this measure, I find that the true growth of variable labor and capital inputs is, on average, almost twice the measured change in the capital stock or labor hours. More than half of that is caused by the presence of overhead inputs in production; the rest is due to cyclical factor utilization.

Suggested Citation

Basu, Susanto, Procyclical Productivity: Increasing Returns or Cyclical Utilization? (November 1995). NBER Working Paper No. w5336, Available at SSRN: https://ssrn.com/abstract=225400

Susanto Basu (Contact Author)

Boston College, College of Arts and Sciences, Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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