Six Answers About Productivity Growth: Number 1

Brad DeLong asks Six Questions About Productivity Growth. The first:
Rapid American productivity growth has continued through the recession. What conclusions should we draw from this?

Occam’s Razor suggests adopting the simplest solution. The fact that productivity growth is normally procyclical (that is, it goes up during booms and down during recessions) is something of a puzzle. Given a fixed capital stock, if employment declines during a recession, the capital stock per worker increases and therefore labour productivity should rise, not fall. Declining labour productivity during recessions has been explained in a number of ways, but the most popular is ‘labour hoarding’. This is the idea that firms do not sack workers when demand slows down because there is some sort of implicit long-term contract, which includes the fact that the employees will stay on and contribute when demand picks up again. The big achievement of the 1990s was to destroy this sort of implicit contractual relationship, to the point where firms now engage in large-scale layoffs even when they are profitable. Employees, particularly younger ones, have learned the lesson that loyalty is for suckers. Hence, labour hoarding is no longer significant, and there is no reason to expect procyclical labour productivity, particularly in the aftermath of a gigantic boom in capital investment.

This isn’t the only possible answer but it seems like a good one to me. It works in nicely with the Thatcher effect, which also yields a combination of weak or negative output growth with very strong productivity growth. The Thatcher effect arises when the lowest-productivity workers are sacked (or plants are closed) raising the average automatically.