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Excerpt from Labor Hoarding, Inflexible Prices and Procyclical Productivity
The phenomenon of procyclical physical productivity in the face of wars and other demand shocks has long been recognized. Businessmen have always appreciated the benefits of cyclical expansion: they are able to use their capacity more fully and so their costs per-unit fall. Countless empirical studies have demonstrated that increases in labor input over the business cycle are associated with more than proportional increases in output.1 The appropriate interpretation of the procyclicality of various productivity measures has long been a matter of debate among economists and has attracted renewed interest since the work of Hall (1987, This paper seeks to rehabilitate both theoretically and empirically an idea that has gone somewhat out of fashion-the notion that procyclical productivity regardless of how measured arises because it is costly for firms to adjust their capacity and so capacity utilization (both in terms of labor and capital) fluctuates over the business cycle. We believe that variations in the extent to which productivity is procyclical have more to do with differences in the extent of labor hoarding than with market power. Developing this line of argument also leads us to a perspective on the reasons why price often seems to exceed marginal cost in US industry which is somewhat different from Hall's.
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