INFLEXIBLE PRICES AND PROCYCLICAL PRODUCTIVITY

Hall has shown that, with perfect competition and price flexibility, total factor productivity measured using labor's share either in revenues or in costs will be acyclical regardless of the level of labor hoarding. We show that if firms producing a homogeneous good under constant returns must pick their prices before demand is known, both measures of productivity become procyclical. The model implies that productivity should be more procyclical the more important is labor hoarding. Empirically, productivity is more procyclical in industries and in nations where labor hoarding appears more important. © 1990 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.