Productivity or Employment: Is it a Choice?

32 Pages Posted: 8 Jun 2013

See all articles by Andrea De Michelis

Andrea De Michelis

Board of Governors of the Federal Reserve System

Marcello M. Estevão

International Monetary Fund (IMF) - Western Hemisphere Department

Beth Anne Wilson

Board of Governors of the Federal Reserve System

Date Written: May 2013

Abstract

Traditionally, shocks to total factor productivity (TFP) are considered exogenous and the employment response depends on their effect on aggregate demand. We raise the possibility that in response to labor supply shocks firms adjust efficiency, rendering TFP endogenous to firms’ production decisions. We present robust cross-country evidence of a strong negative correlation between growth in TFP and labor inputs over the medium to long run. In addition, when using instruments to capture changes in hours worked that are independent of TFP shocks, we find that cross-country increases in labor input cause reductions in TFP growth. These results have important policy implications, including that low productivity growth in some countries may partly be a side effect of strong labor market performance. By the same token, countries facing a declining workforce, say, because of aging, may see accelerating TFP as firms find better ways of employing workers.

Keywords: Productivity, Employment, Labor supply, External shocks, Labor productivity, total factor productivity, employment performance, technology choices, tfp, recession, employment growth, economic growth, business cycle, growth rate, total employment, unemployment, labor market, gdp growth, real business cycle, supply of labor, growth rates, technological change, low employment, self-employment, growth model, joblessness, real business cycle literature, growth accounting

JEL Classification: O33, E20, J23

Suggested Citation

De Michelis, Andrea and Estevao, Marcello M. and Wilson, Beth Anne, Productivity or Employment: Is it a Choice? (May 2013). IMF Working Paper No. 13/97, Available at SSRN: https://ssrn.com/abstract=2276355

Andrea De Michelis (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Marcello M. Estevao

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th St., NW
HQ1-10-115
Washington, DC 20431
United States
202-623-6038 (Phone)
202-589-6038 (Fax)

Beth Anne Wilson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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