Productivity gains during business cycles: what's normal?

The growth of labor productivity surged to an average annual rate of 3.1 percent for the second and third quarters of 1997, after averaging less than 1 percent a year over the previous decade. Such an increase this late in an expansion is unusual and has led some commentators to expect that the burst of productivity will persist, but the CBO feels that is unlikely.

Congressional Budget Office(1)

[T]he fact that no slowdown [in productivity growth] is now apparent is evidence . . . that the economy is behaving as if it remains in a mid-expansion phase, rather than an end-of-expansion phase.

Economic Report of the President(2)

Productivity links the labor force to the economy's real output, a key position that makes productivity growth one of the most eagerly forecast and analyzed economic statistics. A prime example is the current business cycle, in which the pattern of productivity gains has struck many observers as extraordinary.(3)

Economists generally acknowledge that labor productivity growth is procyclical, which means that it is higher, on average, when the economy is expanding and lower when the economy is contracting. This Economic Commentary reviews the leading explanations for this pattern, to see what economic theory implies for productivity growth. Then it uses two different approaches to compare the time pattern of productivity gains over the business cycle. One approach describes the pattern in terms of the number of quarters of economic growth since the business cycle's trough. The other approach uses our knowledge about the ends of past recoveries to describe the typical pattern of productivity gains as a cycle ages.

* Why Should Productivity Be Procyclical?

The procyclical nature of productivity growth is typically expressed as a positive correlation between productivity growth and output growth. In other words, productivity growth tends to be above average when real GDP growth is above average.(4) Theory provides at least three explanations for this business cycle "fact": procyclical technology shocks, increasing returns to scale, and labor hoarding.(5) To this list I would add the depletion of workforce skills, which can be linked to labor hoarding. …

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