Procyclical Productivity: Overhead Inputs or Cyclical Utilization?

Abstract

It has long been argued that cyclical fluctuations in labor and capital utilization and overhead labor and capital are important for explaining procyclical productivity. Her I present two simple and direct tests of these hypotheses, and a way of measuring the relative importance of these two explanations. The intuition behind the paper is that materials input is likely to be measured with less cyclical error than labor and capital input, and materials are likely to be used in strict proportion to value added. In that case, materials growth provides a good measure of the unobserved changes in capital and labor input. I find that labor hoarding and cyclical capital utilization are quanititatively significant: the true growth of variable labor and capital inputs is, on average, almost twice the measured change in the capital stock or labor hours. More than half of that is caused by the presence of overhead inputs in production; the rest is due to cyclical factor utilization.