Explaining procyclical labor productivity -: Evidence from Switzerland

Labor productivity in most countries is procyclical. In Switzerland the correlation between labor productivity and output growth (GDP) is in fact very high, at 0.87. Current literature suggests three main explanations for this empirical fact: a) technology shocks (RBC approach), b) increasing returns to scale in the production function, and c) systematic errors in the measurement of input factors, beginning with physical capital. Based in part on the methodology of Bernside et al. (1995) this paper evaluates the importance of unobserved cyclical movements in capital utilization in the case of Switzerland. To gauge capital utilization we use two ways to measure capital input: industrial consumption of electricity, and average capacity utilization data. We analyze the problem with the help of both annual and quarterly data on two different levels of aggregation. With the help of these proxies we are able to demonstrate that procyclical labor productivity is to some extent a fiction resulting from conventional ways of measuring input factors. Moreover, the more or less constant nature of returns to scale is in contradiction with bf above.