Faculty of Business Seminar Series / Aruni Mitra

Date: Friday, Feb 7th, 2020

Time:10:30-12:00

Location: AB2, Meeting Room 345

Title: The Productivity Puzzle and the Decline of Unions

Abstract: For nearly four decades in the post-War United States, average labour productivity and total factor productivity remained procyclical | falling during recessions and rising in booms. During the mid- 1980s this procyclicality of productivity suddenly started to vanish. I argue that increased labour market exibility, as manifest in rapid de-unionization, can explain this puzzle. I show that U.S. states and industries with a larger drop in union density experienced a deeper fall in the productivity correlations. Falling costs of hiring and _ring workers, due to the decline in union power, prompted _rms to rely more on employment adjustment (extensive margin) instead of changing workers' e_ort through labour hoarding (intensive margin). High dependence on labour hoarding explains productivity's historical procyclicality, and reduced importance of labour hoarding in recent decades explains why productivity is now less procyclical. Changes in the responses of the aggregate U.S. economy to technology and demand shocks also bear out this mechanism. Greater reliance on hiring and _ring of workers also implied a rise in the relative volatility of employment. Allowing the hiring cost to decline between pre and post-1980s in an otherwise standard New Keynesian model with endogenous e_ort is shown to match almost all the fall in cyclical productivity correlations and more than half of the rise in the relative volatility of employment.